TOUGHER 2012 FOR CHINA

China has been the driver of Asia’s strong growth and profits. Chinese carriers posted estimated net profits of $7.7 billion in 2010—nearly half of global airline profits on only about a third of the traffic. Chinese carriers are expected to post a continuous strong profit for the full year of 2011. They collectively posted a net income of CNY29.41 billion ($4.6 billion) for the first nine months of last year, up 6.2% over the net income of CNY27.69 billion in the same period of last year.

“2011 is still a good year for Chinese airlines as domestic market demand keeps growing and domestic carriers are cautious to increase capacity by only 8-10% so as not to oversupply,” China Eastern Airlines board secretary Lou Zhuping said.

According to CAAC’s plan released in January, Chinese airlines were expected to increase 223 aircraft in 2011, up 13.9% over 2010. But based on the regulator’s most recent statistics, domestic carriers only increased 114 aircraft for the first nine months of last year, up 7.1% over 2010. Ping An Securities aviation analyst Chu Hai estimates that domestic airlines would increase by only 150 aircraft in 2011, up 9% compared with 2010, which is the lowest growth rate of domestic capacities for a decade. The reasons are “cautious government control, shortage of aviation professionals, especially pilots, and slots shortage in domestic major aviation hubs as well as carriers’ speeding up phasing out old fleets.”

But it is noteworthy that the double-digit growth rate of the Chinese domestic market has fallen because of economic growth and investment. In January, CAAC set the goal for 2011 passenger boardings to rise 13% to 300 million and cargo traffic to lift 11.5% to 6.2 million tonnes for the full year.

But the regulator revised this target in October to 8% growth in passenger traffic and cargo traffic to remain flat. This was based on the traffic decline in the international market and cargo impacted by global economic uncertainty and Europe’s debt crisis.

Actually, air traffic growth started to slow down since the first half of 2011, especially cargo traffic on international routes mainly owing to China’s declining exports/imports. According to CAAC, cargo traffic dipped 6.3% to 469,400 tonnes for the first ten months of 2011. Cargo traffic dropped 0.2% to 320,900 tonnes on domestic routes and international routes plummeted 17.3% to 148,500 tonnes.

In terms of passenger traffic, Chinese carriers also experienced a slump in international market demand compared with 2010, which was mainly attributable to high international oil prices, slow global economic recovery, oversupply in capacities and natural disasters in different parts of world.

The bright spot is the growth of domestic traffic in central and western China. Passenger traffic grew by about 15% in western China for the third quarter of last year, according to CAAC. “I’m optimistic about domestic market demand [this] year, especially in western China, which I forecast would record 15% growth in 2012 in passenger traffic while the figure would be only 8-9% in Eastern China,” Luo said.

Most of local industry analysts shared the view that Chinese carriers will see a tougher 2012 as “volatile fuel prices still remain a big concern,” Luo noted. So far, fuel charges account for around 40% of Chinese carriers’ operating expenses.

In the aspect of traffic, Chu predicted that the slowdown of traffic growth would continue in 2012 in which domestic market demand will still outpace international market demand owing to the growing trend of domestic passenger consumption. “I think China’s domestic market demand will maintain stable growth in 2012 and the growth rate will be about 8-10% in terms of passenger traffic, just like 2011. Meantime, capacities increase will also maintain a balance with market demand,” Chu said.

But he also noted that Chinese carriers are expected to suffer a “worse 2012” in international markets owing to weaker demand as a result of global economic recession. To make matters worse, Chinese airlines are scheduled to introduce more A380s, 787s and 777s in 2012. Oversupply is expected to hurt domestic airlines’ overall profitability.

Cargo will continue to remain as a weakness for Chinese airlines as they are expected to suffer from continuous operating losses. According to Chu, cargo capacity will surpass demand as Air China, China Southern Airlines and China Eastern Airlines are scheduled to introduce more freighters next year while the growth rate of the market will still linger at 3%.