So much for China's experiment with deregulated air fares. Wide-open pricing, which led to discounts of up to 50 per cent, ended in May when the Civil Aviation Administration of China tightened limits on how much airlines could vary ticket prices.
Last November the CAAC gave airlines an almost free rein to discount domestic fares in an effort to stimulate sluggish demand. But passengers failed to respond as hoped. Desperate to fill seats, airlines offered even deeper discounts than the 40 per cent allowed by the CAAC, but the lower fares simply eroded the carriers' yields.
Beijing has now responded to pleas from major carriers to restore price stability, imposing a 20 per cent cap on any discounts. Air China officials applauded the move, claiming that restrictions on discounting were in the interest of all Chinese airlines.
Discounting was a symptom of deeper problems confronting China's airlines. Many domestic routes face overcapacity. Carriers have simply added seats too fast, but airline officials also complain that the CAAC has been slow to open new routes that might stimulate traffic. But China's economy is probably the major culprit. Even though it has escaped the currency devaluation that is savaging many of its neighbours, growth has slowed and state-owned enterprises have been especially hard hit, causing them to cut back on air travel.
Consolidation has also not progressed as fast as the CAAC hoped. Takeovers require CAAC approval, but Beijing has done little aside public pronouncements to promote them. At present, only two takeovers are underway. China Eastern expects to complete its US$36 million purchase of China General Aviation this year. Based in Taiyuan, capital of Shanxi province, China General has been around for 46 years mostly as an operator of former Soviet aircraft.
The CAAC has also approved China Southern's bid to take a 60 per cent stake in Guizhou Airlines for $5.8 million. Once China Southern takes command at Ghizhou it plans to replace the provincial carrier's turboprops with Boeing 737s. Guizhou will be the sixth airline in which China Southern holds a majority stake. Now that China Eastern and China Southern have both completed their initial share listings, both are likely to look for more acquisitions.
China's three publicly listed carriers have released 1997 annual results. China Southern's net profit increased 10.1 per cent, compared to China Eastern's 7.5 per cent gain. Both were eclipsed by Hainan Airlines, where profit surged 86 per cent. However, that was mostly due to an accounting debate over the right year in which to report a $6 million lease payment. If the payment was charged to last year rather than the year before, Hainan's 1997 profit actually fell 8 per cent.
Source: Airline Business
