Chinese airlines carried 13% more passengers in the first three months of 2014 from a year earlier, though they saw demand being particularly strong to points outside mainland China. At flag carrier Air China Ltd., international passenger revenue rose 19% during the period, slightly below the 22% jump at rival China Southern Airlines Co.
An increasingly congested home market has prompted the nation's state carriers to expand their overseas reach, launching new long-haul routes from smaller cities such as Changsha and Chengdu to destinations in Europe and North America.
But the move also mirrors the consistent growth in the number of Chinese leisure travelers seeking to go abroad, despite China's economic expansion slowing to 7.4% in the first quarter, its lowest level in 18 months as the world's second-largest economy continued to downshift.
"Slower economic growth won't have immediate impact on leisure air traffic unless there are one-off factors such as a major economic crisis or natural disasters that significantly disrupt air travel sentiment," said Kelvin Lau, a transport analyst at Daiwa Securities, noting he expects demand for leisure travel to remain resilient.
During the first quarter, the number of Chinese air passengers traveling abroad rose 17% from a year earlier, according to the nation's aviation regulator, reaching 7.1 million people and accounted for nearly 8% of all airline passengers.
Nonetheless, net earnings figures released this week showed that China's 'Big Three' state carriers reported significantly weaker first-quarter results because of a weaker national currency, which fell 2.7% during the period against the U.S. dollar.
The Big Three—Air China, China Southern, and China Eastern Airlines Corp. —have as much as 80% of their net debt denominated in U.S. dollars to finance aircraft leases and purchases, and any fluctuations in the yuan would have a major impact on their bottom lines. The weaker yuan has also hurt corporate profits among other Chinese industries, such as oil refiners, because crude oil is denominated in U.S. dollars.
Air China on Tuesday said its first-quarter net profit plummeted 63% to 92.7 million yuan ($15 million), compared with 249 million yuan in the year-earlier period. Meanwhile, China Southern and China Eastern posted a combined net loss of 511 million yuan during the period.
Yet these foreign-exchange losses are mostly noncash, as companies are required under accounting rules to value their substantial foreign-currency debts at the end of every quarter.
Consequently, they don't pose significant medium-term impact if the yuan's declines stabilizes near current levels, say analysts.
The weak net results therefore mask the robust earnings pickup in the nation's airline industry for the quarter. All the Big Three carriers would have been profitable on an operating level if the currency impact was excluded.
At China Southern, for example, operating profit saw a near fivefold increase to 1.07 billion yuan, from 188 million yuan in the same period last year, according to Barclays Capital estimates. With the currency impact, the airline swung to a net loss. Similarly, at Air China, first-quarter operating profit increased by 515 million yuan excluding the foreign exchange items.
The overseas expansion drive by the Chinese airlines is helping improve utilization of the many widebody aircraft the carriers have ordered over recent years. Most aircraft orders by the state airlines are done through a centralized procurement agency by the government, and in the past have led to mismatches between capacity and demand.
However, analysts say they expect some of the new international routes to remain unprofitable in the near term or manage to break even at best.
The Chinese airlines are "going into this faster growing segment to broaden their earnings stream, but in the medium term these new businesses won't necessarily be very profitable to them because of the startup costs attached with the network expansion," said Andrew Orchard, an aviation analyst at CIMB Securities
The outlook for the Big Three carriers will also be overshadowed by the government's recent efforts to liberalize the nation's skies. The government earlier this year unveiled long-awaited guidelines to jump-start the nation's fledgling budget-airline market, including pledges of financial support, plans to simplify approvals for new low-cost airlines, as well as measures to help existing budget carriers expand their fleets more quickly.
Mr. Orchard said he estimates nonstate airlines, including budget carriers, account for around a quarter of seat capacity on routes that they compete head-to-head with state carriers. He expects these private airlines to play an even bigger role in the domestic travel market going forward.
"The history of low-cost carriers is that they've been price eroding so it's logical to assume that there'll be some ticket price impact," he said.
Source: Wall Street Journal by Joanne Chiu
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