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Aviation Industry Set to Take off?
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Chinese airlines raked in an aggregate profit of 1.54 billion yuan in the first half of this year thanks to brisk market demand, appreciation of the renminbi and lower jet fuel prices.

 

The strong performance in the first six months, usually a slack season for the airline industry, could be a prelude to continued robust growth in the next three years, analysts said.

 

Chinese carriers have seen first-half losses over the past two years. The industry's aggregate loss for the first half last year skyrocketed to 2.57 billion yuan on record-high oil prices.

 

"Strong market demand brought by China's fast economic growth is the main driver (of this year's results)," said Ma Xiaoli, an aviation analyst with CITIC Securities.

 

Chinese carriers transported 86.7 million passengers and 1.82 million tons of cargo from January to June, up 16.7 percent and 15.3 percent over the same period last year, according to the General Administration of Civil Aviation, the industry regulator.

 

Average passenger loads were at 73.9 percent during the first half of 2007, a year-on-year increase of 1.6 percent.

 

"Besides the sound economic growth, the Chinese airline industry will benefit a lot from a series of global events in the coming three years," Ma said. The three events are the 2008 Olympic Games in Beijing, the 2010 Shanghai World Expo and the Asian Games Guangzhou in 2010.

 

The CAAC expects China's aviation industry to maintain an average annual growth rate of 14.6 percent during the 11th Five-Year Plan period (2006-10).

 

"The growth rates for last year and the first half of this year have exceeded that expectation," Ma said, adding that a capacity increase in the coming three years would be stable despite brisk market demand.

 

"The CAAC and Chinese airlines' planned capacity increase for the 11th Five-Year Plan period is based on their previous forecast of a 14.6-percent annual growth rate. They are unlikely to significantly change their original plans," Ma said.

 

"On the other hand, due to the global aviation industry revival, Boeing and Airbus have sold so many aircraft that it is difficult for them to respond to short-term needs and their production positions are basically sold out till 2010," Ma added.

 

The renminbi appreciation has also helped Chinese airlines cut costs, analysts said.

 

It has reduced the cost of purchasing and leasing aircraft and aviation equipment as these transactions are settled in US dollars. Chinese airlines' maintenance and landing fees at foreign airports are also lower because of the appreciation.

 

The stronger renminbi gave China Southern Airlines an exchange gain of about 1 billion yuan in the first half, with Air China reaping more than 800 million yuan and China Eastern Airlines getting about 700 million yuan, Ma said.

 

The renminbi is widely expected to pick up speed in the second half of this year.

 

The biggest risk to Chinese airlines is the price of aviation oil, said Li Lei, an aviation analyst at CITIC Securities.

 

"But we shouldn't exaggerate the negative impact of oil price rises," said Ma, adding that Chinese airlines are using jet fuel forward contracts to hedge costs and higher fuel surcharges are often levied on consumers when oil prices rise.

 

Domestic jet fuel prices were lowered four times, an accumulated drop of 360 yuan per ton, during the first half of this year. If jet fuel prices drop 100 yuan per ton, Air China would gain extra profit of 204 million yuan, while China Southern's profit would increase 266 million yuan, according to figures from CITIC Securities.

 

Major Chinese carriers will soon issue their interim reports.

 

Air China, the nation's flagship carrier, last month forecast its first-half net profit would increase 20 times due to strong market demand and appreciation of the renminbi, which could take its net profit past 900 million yuan. Air China was the only profitable company of China's three largest aviation groups in the first half last year, with a net profit of 45 million yuan.

 

Guangzhou-based China Southern and Shanghai-based China Eastern both forecast they would get back in the black in the first six months of the year. China Southern reported a loss of 835 million yuan during the same period of last year, while China Eastern suffered a huge loss of 1.4 billion yuan.

 

(China Daily August 10, 2007)

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