Oil Prices Bring Turbulence for Air Shares
By Lu Haoting, China Daily | Sep. 13, 2006
Investors with shares in China's domestic airlines have been warned to fasten their seat belts.
Airline share prices are suffering from the turbulence stirred up by soaring fuel prices, despite short-term positive news such as the increased jet fuel surcharges.
"Our rating for Chinese airlines is medium and we are advising our clients not buy stocks within the next three to five years," said Sun Zhimin, an analyst with Guodu Securities.
"The whole industry is plagued by surging fuel prices, which is the largest uncontrollable item on any airline's balance sheet," said Sun.
The Chinese airline industry suffered an aggregate 2.57 billion yuan (US$321 million) loss in the first half of 2006, more than quadruple that in the same period last year.
Record high fuel prices triggered a 21 per cent year-on-year rise in airlines' costs. And the three main airline groups have all released unsatisfactory interim reports.
China Eastern Airlines posted the largest loss. Its net loss in the year's first half nearly tripled year-on-year to 1.7 billion yuan (US$213 million). The Shanghai-based airline's fuel costs increased 86 per cent over the same period last year. Its fleet expansion exacerbated the hefty fuel costs driven by rising fuel prices.
Guangzhou-based China Southern Airlines reported a net loss of 825 million yuan (US$103 million) in the first half of this year, about level with the loss incurred a year earlier. Its fuel costs rose 27.6 per cent year-on-year.
Air China maintained its leading position as the most profitable Chinese airline during the first six months, but its net profit dropped 22.5 per cent year-on-year to 458 million yuan (US$57 million). The flagship carrier's fuel costs rose 40 per cent over the same period last year.
Analysts said domestic airlines are expected to benefit from the peak travel season in the second half of the year and the increased aviation fuel surcharges. But those are only short-term positive factors and can do little to pull the airlines out of the industry's nosedive.
The Chinese Government last month gave the nod to local carriers to increase fuel surcharges on domestic routes for the second time in a year.
Starting from last Friday, each passenger flying less than 800 kilometres has to pay a 60 yuan (US$7.5) oil surcharge, up from 30 yuan (US$3.7). The rate for those travelling more than 800 kilometres has been raised from 60 yuan (US$7.5) to 100 yuan (US$12.5).
The last oil surcharge rise came in April this year, with the charge climbing from 20 yuan (US$2.5) to 30 yuan for short-distance flights, and from 40 yuan (US$5) to 60 yuan for flights more than 800 kilometres.
"It is a big hike and it is almost equal to a 5-7 per cent rise in the current cost of an air ticket," said Li Lei, an aviation analyst with CITIC China Securities.
"If the ticket prices and domestic airlines' operating costs still maintain the current level, the whole airline industry could possibly earn 6 billion yuan (US$750 million) more in revenues because of the oil surcharge raise," said Li.
"But remember, that will happen only if other variables don't change," said Li, adding that price cuts have been Chinese airlines' favourite tactic of fighting for market share and oil prices are still likely to hover around record levels.
The three airline groups' A shares witnessed their largest increases in recent weeks on Monday. China Eastern's shares rose 7.44 per cent, with China Southern climbing 4.27 per cent and Air China up 2.53 per cent.
Li attributed the rise to the implementation of increased oil surcharges.
"But that is just a short term factor creating some fluctuations in airline stocks," said Li. "Airline stocks are still not a good pick for mid and long-term investment."
Analysts said long-term decisive factors include aviation fuel prices and the airlines' own corporate management and profitability.
Crude oil prices in the international markets have been hovering at around US$70 per barrel. In response domestic aviation fuel prices have been raised five times, hiking nearly 50 per cent, since March 2005.
How to streamline acquired businesses is another major challenge for by China Eastern and China Southern.
"The record high oil price is the main reason for the loss, but we also have some 'historical' problems," said Luo Zhuping, secretary to the board of China Eastern.
"China Eastern has been acquiring businesses in the past several years, which have created some burdens for the company," said Luo.
China Eastern last year acquired China Northwest Airlines and China Yunnan Airlines. The airline reportedly paid 900 million yuan (US$113 million) for the acquisitions.
China Southern also acquired two airlines last year China Northern Airlines and Xinjiang Airlines.
"Although the acquired companies now use the logos of China Eastern and China Southern, they still have a long way to go to really consolidate their resources, their staff and their management," Li said.
"The pace of their consolidation is too slow," said Li, adding that the acquisitions failed to improve the overall profitability of the airline groups and became burdens.