China's airlines feel pressure from oil prices and high-speed rail

APD NEWS

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Operating profits at China’s three main airlines fell sharply in 2017, due to rising oil prices and China’s rapidly growing high-speed train network.

Information from the Hong Kong Stock Exchange shows operating profits of major Chinese airlines Air China, China Southern and China Eastern squeezed by 32.9, 27.4 and 25 percent respectively last year, despite an overall increase in net profits and revenue.

As more Chinese travelers take to the skies on board domestic and international flights, demand remains very high in the civil aviation sector. This has pushed airlines like Air China to launch new international routes ahead of an expected surge in travelers, with mixed results based on the company’s stock report.

Passenger yield – a measure of average ticket fare paid per mile per passenger – was down 0.45 percent in 2017, despite overall passenger numbers being up by 5.2 percent.

At a press briefing last Wednesday, Air China’s marketing manager Luo Yong said “operational investment into United States and Australia routes far exceeded demand growth,” suggesting passenger numbers to these regions had failed to meet expectations.

Airlines exposed to rising oil prices

One of the biggest hits to operating profits in the sector last year was the rise in oil prices. According to Caixin, China Southern saw its outlay on jet fuel costs increase by more than 34 percent between 2016 and 2017.

50.64 percent of operating costs went on fuel according to the company’s stock filing, which said that rising prices as well as an increase in flights were behind the higher operating costs.

The recent launch of yuan-denominated oil futures should leave domestic airlines less exposed to fluctuations in oil prices in the future.

Presently, most major airlines do not hedge their purchases of fuel. At Air China’s press briefing, the company’s board secretary Zhou Yong told media the company was following the launch of oil futures closely.

More passengers pick trains over planes

A report by Morgan Stanley in 2017 suggested that Chinese domestic travelers are switching from air travel to high-speed rail, citing greater comfort and convenience, as well as growing frustration at flight delays between major airports in the country.

Giving the example of bullet-train journeys ending in east China’s Hangzhou during peak travel periods, China Railway Corp reported last year that year-on-year demand was up 140 percent.

That uptick in rail passengers will have a knock-on effect for domestic airlines. Morgan Stanley’s report concluded that Chinese airlines’ market share in domestic travel would fall from 13.4 percent to 12.5 percent in 2019, forcing companies like Air China to put greater focus on its international business.

Last September, the Civil Aviation Administration of China (CAAC) said that the country’s two busiest airports would cut their departures to 75 percent of current capacity, in a bid to cut delays.

Beijing Capital International Airport and Shanghai Pudong International Airport saw only 47.2 and 46 percent of flights depart on time respectively in the first eight months of 2017.

(CGTN)