Despite the fact that one Chinese airline after another has forecast a first-half profit, significant operational challenges still face the industry as it continues to grow.

Recently, China Southern Airlines said it expects to reverse a 835 million yuan (US$110.2 million) loss in the first half of 2006, while Air China forecast net earnings more than 20 times greater than the 45.8 million yuan posted in the year-ago semester. China Eastern Airlines expects to return to profit following last year's 40 million yuan loss and Hainan Airlines revealed that it expects earnings to increase by 750% year-over-year from 20.8 million yuan.

The industry's growth has been key to the carriers' success. According to CAAC statistics, domestic passenger traffic in the first five months of 2007 jumped 19% year-over-year while international traffic rose 20%.

"Although Chinese airlines' load factor and aircraft utilization rate improved in the first half, it didn't necessarily mean China's airlines removed the root causes for their previous losses," Hainan Airlines Board Secretary Zhang Shanghui said. "The rising fuel price is still a major haunting problem."

East Star Airlines spokesperson Wang Yankun also noted that the threat of rising domestic fuel prices is the most significant bit of uncertainty facing airline management as international prices continue to rise. Spring Airlines spokesperson Zhang Lei warned: "If we can't maintain effective cost control, it will be difficult to earn a profit."

Civil Aviation University of China President Wu Tongshui pointed out that oil price is not the only thorny issue. "Generally speaking, Chinese airlines' operating costs and liability rate are still very high," he said. "Their unbalanced networks also caused big problems, as an unreasonable proportion of trunk routes to regional routes, as well as domestic routes to international routes, led to a huge loss of high-end passengers. It is the fundamental problem Chinese airlines are facing and it still remains unresolved."

Local industry analysts have pointed out that route development trends generally are incompatible with aircraft types and airport infrastructure, which results in wasted resources and low efficiency. In addition, Chinese network carriers remain in an inferior position when competing with foreign counterparts on international routes, which is attributable mainly to a shortage of hub-and-spoke systems.