Beijing's move to hike air fares across the board shortly after scrapping the domestic surcharges for foreign travellers could stunt passenger growth further but should help boost domestic yields.

The fare hike is based on proposals put to the government by the Civil Aviation Administration of China. This translates to a 13.6 per cent average rise in fares per kilometre, but the increase is quite heavily skewed to specific routes. In the busy Beijing-Guangzhou corridor, for example, fares rose 58 per cent. This increase will certainly come as a boost for Guangzhou-based China Southern, which has just made its stock market debut (see story opposite).

But some analysts suspect that the fare hike could retard traffic growth. Despite official forecasts of 10 to 12 per cent growth this year, the first five months have witnessed a rise of only 9 per cent in passenger numbers. This is impressive, but less than half the 18.4 per cent growth in the same period last year.

The decision to drop the surcharges was prompted by Beijing's desire to join the World Trade Organisation and is part of a wider policy of removing dual pricing in all sectors of the economy. The practice of discriminating against foreigners by applying surcharges runs contrary to the principles of the WTO.

The positive effect of the price hike, however, will be to boost yields. This has prompted Chinese carriers to shift more emphasis to domestic operations. China Eastern plans to add domestic flights and China Southern revealed during its IPO roadshow that its strong domestic network contributes more to its balance sheet than overseas flights.

David Knibb

Source: Airline Business