Last updated: June 8, 2009 4:27 pm

Tough times for airlines

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It is only a coincidence that China started tinkering with its bloated aviation sector on the day that Iata, the global trade body, doubled its estimate of full-year losses across the industry. The $9bn figure that ricocheted around Iata’s annual meeting probably caused mere shrugs in Beijing. Although China is the world’s fastest growing airline market, its top three carriers alone lost almost half that last year.

Chart

While Beijing is not content to put up with big losses indefinitely, it is questionable whether it has the appetite to tackle the radical restructuring that the airline industry so badly needs, and not just in China but globally. So far, Beijing has done the easy stuff, such as encouraging carriers to scale back international routes. But that does not address the core problem of domestic over-capacity. And neither does Monday’s terse disclosure after the market close from the weakest of the three, China Eastern, that it was exploring “material restructuring” and ways of “further lowering the gearing ratio”.

The assumed deal – a merger with local rival Shanghai Airlines – makes sense. Not only does China Eastern face competition in its primary Shanghai hub – Air China and China Southern meanwhile have Beijing and Guangzhou to themselves respectively – it has two international airports to service, doubling its costs. Yet with total liabilities exceeding total assets by about $1bn, the merged entity would still need a big state dowry to get started, on top of the $1.5bn injected into both companies since last year.

The smarter option would be to bash together Air China and China Eastern, providing China’s international flag carrier with a dominant position in the mainland’s two key hubs. Air China is already a de facto consolidator through aggressive pricing; while its passenger volumes grew 14 per cent in the first quarter, year on year its revenues fell almost 7 per cent. Seven years ago China bungled a round of consolidation, allowing dozens of second-tier players to limp on. It seems set to make the same mistake twice.

 

BACKGROUND NEWS

 

Global airlines are expected to make losses of $9bn this year, double the level forecast as recently as March, according to Iata, the global airline trade association.

Airline losses in the first three months of the year had been much worse than expected as a result of very sharp falls in both revenues and yields (average fare levels), Giovanni Bisignani, Iata director-general, told its annual meeting on Monday.

Many global airlines including leaders in Europe such as Air France-KLM and British Airways already face a second year of losses and carriers are expressing concern about the renewed spurt in oil prices, as the slump continues in the global economy.

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