Airlines see hope as sky turns blue
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Shanghai Daily, August 1, 2011
Battered public confidence in bullet trains, the prospect of lower jet fuel costs and a rising yuan have combined to provide a fillip for the sagging market fortunes of Chinese airlines.
The share prices of China's three biggest airlines took off the day after a high-speed train accident on the Hangzhou-Wenzhou line killed 40 people in Zhejiang Province, near Shanghai.China Eastern Airlines' shares increased by the 10 percent daily limit in the Shanghai market. China Southern Airlines rose 9.2 percent and Air China gained 6.9 percent.
"The valuation of airline stocks is close to a record low and has fully priced in the impact high-speed railways were expected to have on flights," said Wu Li, an analyst at Essence Securities.
"A lower-than-expected outflow of air passengers will trigger a rebound in airline stocks," he said.
China Eastern Board Secretary Luo Zhuping told Shanghai Daily that the current rebound in airline stocks may not last long, but the future of airlines in a country of more than one billion people is assured.
"China Eastern was most affected when the Shanghai-Beijing high-speed railway opened, so it rebounded the most when investors became concerned about the safety of bullet trains," Luo said.
Amid renewed questions about the safety of bullet trains, Air China has deployed Boeing 777-300ER jets, normally used on long-haul international routes, to fly between Shanghai and Beijing - the most profitable domestic route.
"We saw a drop in load factor after the Shanghai-Beijing high-speed railway opened, but the figure has rebounded recently and we have begun regaining ground," said Xu Junqin, senior marketing manager of Air China's Shanghai branch.
Xu said he is confident that passenger volumes will rise as travelers choose airlines as a safer option. The rebound in passenger numbers will allow airlines to price tickets higher after they were forced to discount heavily to counter rail competition, he said.
"We think airlines in the short term may regain market share lost to high-speed railways, as travelers' confidence in China's high-speed railways could take time to rebuild," Goldman Sachs said in a report.
Analysts also said they expect jet fuel prices to drop after China last month removed a 6 percent import tariff on the fuel.
"The burden on airlines will be eased because the Singapore jet fuel price declined sharply in June and July after touching a peak in April, and because China has begun waiving the import tariff on jet fuel," said Zhang Hongbo, an analyst at CITIC Securities Co.
Imports account for about 40 percent of Air China's fuel, 30 percent for China Eastern Airlines and 20 percent at China Southern Airlines. Fuel costs are generally about 40 percent of an airline's operating costs.
Also starting today the National Development and Reform Commission, the country's top planning agency, will adjust factory prices for jet fuel every month to better reflect movements in global oil prices.
The NDRC has ruled that the factory price of jet fuel can't be higher than the import price, based on the Singapore spot fuel market.
China previously adjusted its factory jet fuel prices at the same frequency as prices for retail gasoline and diesel, which were based on any move of more than 4 percent in the cost of a basket of benchmark crudes over 22 working days.
Under the new mechanism, factory prices will be based on post-tax import costs for fuel, plus a premium to be adjusted once a year through negotiations between buyers and suppliers. The mechanism will take into account demand, freight, transaction volume and global crude price.
"The mechanism is more market-oriented and links factory fuel prices tightly with the global oil price," CITIC Securities' Zhang said. "Airlines will have stronger pricing power to better control their costs."
The NDRC has increased factory jet fuel prices three times this year to 7,640 yuan a ton, a 27.5 percent increase from the end of last year.
The latest increase occurred on May 25 when the West Texas Intermediate benchmark exceeded US$110 a barrel. WTI crude futures for September delivery dropped to US$95.70 on the New York Mercantile Exchange last Friday, so a lower factory jet fuel price is expected to be settled today.
Meanwhile, the yuan rose to a fresh high last week against the US dollar, as Democrats and Republicans in Washington continued their wrangling over the nation's budget deficit and debt ceiling.
The appreciation of the yuan means cheaper prices for Chinese airlines buying airplanes and aircraft parts internationally since those products are priced in US dollars.
"We predict the yuan will rise 5 percent by the end of this year, which will increase earnings per share by 0.13 yuan for Air China, 0.15 yuan for China Southern and 0.07 yuan for China Eastern," said Zhang Zhuo, an analyst at Minsheng Securities Co.
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