China bucks the downturn at home

Singapore
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Chinese carriers may not have escaped the economic crisis unscathed, particularly on cargo and international routes, but domestic traffic is surprising healthy and has defied the downturn with double-digit growth since October. In an odd twist, domestic traffic growth was weakest between May and August 2008, because of the Sichuan earthquake in mid-May, but rebounded as the rest of the world hit the downturn.

While international traffic has been badly hit, and is still down on last year, there are indications that China's airlines are slowly recovering. During the first quarter the three major airline groups - Air China, China Eastern and China Southern - posted profits.

An analysis of the major Chinese carriers' monthly traffic statistics shows the drop-off in international cargo started in May last year. By June international passenger traffic started contracting at double-digit rates, pushing most of the country's airlines into the red for 2008. Airlines responded by slashing capacity, getting rid of unwanted aircraft and delaying aircraft deliveries.

April data for the big three shows international traffic is still down year-on-year, but domestic is rising. Air China, China Eastern and China Southern posted 16%, 25% and 6% domestic RPK growth respectively.

The domestic activity of ­Chinese carriers is much bigger than their international business, so domestic RPK growth has been enough to boost total RPKs. "The rebound in the domestic market is good news and the warming of cross-Straits ties means we have seen [China-Taiwan] routes flourishing," says director general of the Association of Asia Pacific Airlines, Andrew Herdman.

While Taiwan has given China a welcome boost, international cargo traffic looks like it will be slower to recover. Air China, China Eastern and China Southern posted a 14%, 5% and 28% fall in cargo traffic in April respectively. Centre for Asia Pacific Aviation executive chairman, Peter Harbison, says cargo recovery "is a long way off".

He adds that, in a global context, we are now seeing "a bottoming out and a deceleration" of the negative growth and international cargo will start to pick up before economic growth improves. But Harbison is less optimistic China's international passenger traffic will recover any time soon, noting it has generally fallen because of capacity cuts.

"Chinese carriers don't have strong global brands so they rely on outbound traffic," Harbison says, explaining why he thinks international traffic has been hit so hard. "They are not strong performers in generating inbound sales. Most inbound tends to be students and low yield traffic."

In response to the crisis, the government axed its tax on fuel surcharge revenue, opened China's airspace further to allow more direct routings and stepped in to bail out struggling state-controlled airlines. It gave China Eastern's parent seven billion yuan ($1.03 billion), and talks are underway to give it a further two billion yuan. China Southern Airlines' parent has also received three billion yuan, but Air China has received no bailout because it is in relatively strong shape.

Funding boosts

Airlines that have less sway with central government have turned to local governments. Hainan Airlines has received 500 million yuan from the Tianjin municipal government, and is getting a three billion yuan bail-out from its parent company and the Hainan provincial government. Shanghai Airlines, meanwhile, has agreed to sell about 15% equity to hotel operator Jinjiang International so it can raise one billion yuan.

It has also been speaking to its major owner, the Shanghai Municipal Government, about a cash injection, but that government has been talking with China Eastern's parent about merging the two Shanghai-based carriers. This appears to be gaining pace. Trading in their respective shares on the Hong Kong stock exchange was suspended in early June, amid reports a merger announcement is imminent. China Eastern says it is in the process of planning a "material restructuring".

Consolidation has already seen Shanghai-based Juneyao Airlines take control of Okay Airways after the Tianjin-based carrier hit financial problems, while in March Sichuan Airlines Group paid 200 million yuan to increase its stake in Chengdu's United Eagle to 76% from 20%.