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China airlines back in black but turbulence ahead: experts

by Staff Writers
Shanghai (AFP) Jan 24, 2010
China's airlines returned to profit in 2009 as traffic rose, fuel prices fell and government policies provided a favourable tailwind, but analysts warn they could face fresh turbulence this year.

The country's three biggest carriers -- China Southern Airlines, Air China and China Eastern Airlines -- all suffered heavy losses in 2008 as the global economic crisis struck, but said this month they will be in the black for 2009.

The industry as a whole posted a combined profit of 7.4 billion yuan (1.1 billion dollars) in 2009 and passenger volume grew 19.7 percent on-year to 230 million, according to the Civil Aviation Administration of China.

But analysts said while the outlook remained solid for 2010, the airlines would lose steam as the explosive growth in passenger volume slowed, with some travellers opting to stay home and others looking at cheaper forms of transport.

"We are generally optimistic about the aviation industry, given the positive fundamentals such as the 2010 World Expo and continued economic recovery," said Chen Huanyu, an analyst at brokerage Guotai Junan in Hong Kong.

But he warned the 2009 turnaround was largely underpinned by non-operating profits such as gains in fuel hedging deals and nearly two billion dollars of government aid granted to the top three carriers since late 2008.

"We are going to see some uphills and downhills in their earnings in 2010 and maybe the following year," Chen said, noting carriers would be hit with the resumption of payments to an infrastructure fund, halted during the crisis.

The Chinese airlines, who gave the profit estimates in preliminary announcements, have yet to release complete full-year financial results; those are due in late March and April.

But their expected return to profitability stands in sharp contrast to a net loss of 11 billion dollars for 2009 for global airlines, according to an estimate from the International Air Transport Association.

Last week, Japan Airlines filed for bankruptcy protection with 26 billion dollars of debt in that country's biggest post-war corporate failure outside the financial sector -- a victim in part of the global crisis.

China's carriers have benefited from the country's resilience during the crisis -- the world's third-largest economy expanded by a red-hot 8.7 percent last year -- but experts say business will slow as price fears mount.

"While we think the outlook remains positive, the pace of traffic growth should moderate, as travellers are more concerned about general inflation and rising property prices," Credit Suisse analysts said in a research note.

"As a result, the desires and budgets for travelling will inevitably be affected," they said.

The number of air travellers will also slip as high-speed trains emerge as a cost-effective alternative, with China hard at work on completing a link between Shanghai and Beijing, analysts said.

Last month, China launched what it calls the world's fastest railway service linking central Wuhan and the southern city of Guangzhou, shortening the 10.5-hour trip to just three hours.

"Because of the construction of high-speed rail, part of the market will be diverted to railways," said UBS aviation analyst Thomas Kwan.

He however noted the influence of high-speed railways was not likely to affect the airlines in the short term, and sustainable growth of the air travel market in China could be sufficient to absorb any long-term negative impact.

"The domestic market is enormous," Kwan said.

According to official forecasts, air passenger traffic is expected to rise by 13 percent on-year in 2010 to 260 million, while cargo volume will grow 12 percent to 4.98 million tonnes.

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