Thursday, July 24, 2008

Chinese traffic dip cause for some concern

By Nicholas Ionides
China reported a rare drop in traffic for May and June. Is this the start of bad times for the country's carriers?
Weakness in the Chinese air travel market is taking industry watchers by surprise and it is unlikely the traditional annual growth rates of 14-16% will return any time soon.

Signs of weakness first started appearing in China earlier this year, when the country's major airlines began reporting monthly traffic growth below the traditional double-digit percentage rises. But it was May and June ­traffic figures that took most by surprise. Air China posted a 7% drop in overall revenue passenger kilometres for May ­followed by a 6% drop in June. China Eastern's RPKs fell 6% in May and 12% in June. China Southern's RPKs increased only 1% in May and dropped 4% in June.

Overall, the number of passengers carried by Chinese airlines in May fell 1%. This is well below the rates the Chinese government expected at the start of the year, when it said it was anticipating a 14% rise in passenger numbers in 2008. Last year traffic grew some 16% over 2006.

The Centre for Asia Pacific Aviation says the recent weak traffic figures in China are cause for concern, adding that this is "a development that carries significant ramifications for domestic and international airlines and airports". Industry observers point out there were several unexpected factors behind the decline, such as a devastating earthquake in Sichuan and poor weather in parts of the country. In addition, China has clamped down on issuing visas to foreigners in recent months ahead of the Olympic Games in Beijing, which begin in early August. The restrictions are expected to be eased after the Olympics, but whether this leads to a pick-up in air travel right away is something that will be watched for closely.

The decline in demand comes at a bad time for Chinese carriers, many of which have not been well prepared for increases in fuel prices. "Financially I think it will be a very bad year," says CAPA executive chairman Peter Harbison. "Even in good times with strong traffic growth, Chinese carriers were struggling to make a profit. Now you are starting to see things reverse with the economy declining and fuel prices increasing."

Foreign carriers serving China have also been reporting weaker demand. Several US majors have delayed or reduced new services to China won last year. European airlines are also cutting China services with Air Berlin suspending Beijing and Shanghai and Finnair dropping Guangzhou.

Temporary Blip?

Airbus China president Laurence Barron believes the slowdown will only be temporary, however, adding that the European manufacturer is not looking to make any changes to its bullish sales forecasts for China due to the recent weakness in traffic. "There have been a number of events this year which have had a negative effect on traffic, like snowstorms and the Sichuan earthquake. Also because of security reasons before the Olympics the government has made it much more difficult for people to get visas," he says. "None of these are long-term issues, and things like this will come and go."

But Hong Kong-based HSBC analyst Mark Webb says the Olympics "rarely provides any significant traffic upside for airlines" and "at the end of the day with demand dropping and all the capacity coming in, the industry obviously faces problems". Morgan Stanley analyst Chin Lim agrees: "Fundamentally we're worried about the Chinese carriers. Revenues will fall and loads will fall. The slowdown I think will carry on for the rest of 2008."

Barron agrees with Chin that high inflation rates and increases in ticket prices may lead to a dip in demand. But Barron adds: "When we talk about slowing things down in China, it is not like slowing things down elsewhere. Things will still be growing faster than most other places."

Chinese airlines also do not appear concerned. As Shenzhen Airlines president Li Kun says: "Everybody knows in China the political situation is stable, and the policies are quite open, so we believe that the economy will continue to grow strongly and things will develop quite fast. This is just temporary."

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