Paul Lewis/SINGAPORE
Asian economic woes have finally begun to catch up with the Chinese air transport industry, with the country's two largest carriers China Southern Airlines and China Eastern Airlines sliding into the red in the first half of 1998 as the result of growing overcapacity and deteriorating yields.
China Southern made a net loss of ´72 million ($8.7 million) for the six months of the year ending 30 June, compared to a net profit of ´409 million in the same period in 1997. This was mirrored by China Eastern, which reported an interim net loss of ´33 million, down from a surplus of ´306 million last year. The two results came in at the low end of market projections, with neither carrier earning sufficient revenue to cover interest costs even after deducting foreign exchange losses. "Our results reflect the extremely difficult operating environment that we're facing," says China Southern chairman Yu Yan En.
Increased capacity has outstripped passenger traffic growth, which is being undermined by a slowdown in Chinese economic expansion. At the same time, steep domestic ticket discounting has eroded revenue, with China Southern suffering a 12.4% slide in overall passenger yield and China Eastern 15.4%. Beijing has since moved to cap airline price discounting to a maximum of 20%.
"Both airlines need to do quite a bit to restrict capacity growth and downsize by expediting the early return of leased aircraft," says Salomon Brothers senior research analyst Peter Negline. Faced with rising maintenance costs, China Southern has already announced the return of two leased Boeing 75s7 and two 767-300s, while China Eastern is considering similar moves.
A further concern for the two recently listed carriers is the possibility of Beijing devaluing the Chinese yuan, despite government assertions to the contrary. Over 80% of China Eastern and China Southern's debts are denominated in either US dollars or Japanese yen. "They are going to be hit for six if there is a devaluation," predicts one analyst.
Interim results for neighbouring Taiwanese flag carrier China Airlines (CAL) also slumped into the red with its first net loss in 12 years. It lost NT$1.56 billion ($44.8 million) in the first half of the year ending 30 June, compared to a net profit of NT$1.42 billion for the same period in 1997. CAL's revenue fell by 12%, to NT$23.72 billion, as local travellers stayed away in the wake of the crash of an Airbus A300-600R in February at Taipei, when 202 people died.
Source: Flight International
