Costlier jet fuel is eroding profits at airlines worldwide, but carriers in China -- Asia's fastest-growing aviation market -- are faring worse than most.
Surging jet fuel prices threaten to wipe out profits for the first half of the year at most of China's publicly traded carriers, with their combined interim losses exceeding $49 million, official state media report. The financial pain intensified over the weekend when Beijing announced its third increase since February in the price that Chinese airlines must pay a state-run monopoly for their domestic fuel supplies.
China's airlines won a partial reprieve with last week's revaluation of the yuan by about 2 percent against the U.S. dollar. Much of the debt these carriers owe is denominated in dollars, and analysts say the strengthened yuan should give them enough of a one-time lift to temporarily offset most of their fuel-related losses.
Still, their poor interim results are coming just as these airlines prepare for a strategic takeoff. The government has moved briskly in the past few years to make state-run carriers stronger and more competitive, but continued losses from high fuel costs could retard the development of a financially stable aviation industry.
Cumulative losses could crimp the ability of these companies to invest in new aircraft. Chinese airlines are expanding their fleets rapidly, a trend underscored by an order Thursday from national flag carrier Air China Ltd. for 20 Airbus A330-220 jetliners, a deal valued at $3.9 billion at list prices.
Airbus's Chicago-based rival, Boeing Co., forecasts China will become the world's second-biggest aviation market after the United States during the next two decades.
Yet at least five Chinese airlines expect to post losses for the first six months of the year because of higher fuel costs, the official Xinhua news agency reported last week. Two of the country's largest carriers, China Eastern Airlines and China Southern Airlines, have issued profit warnings for the first half. The other likely money-losers are Hainan Airlines, Shanghai Airlines and Shandong Airlines, Xinhua reported, citing data from a regulatory agency, the Civil Aviation Administration of China.
Only Air China anticipates making an interim profit. An Air China official confirmed that the company was profitable in the first half but added that earnings were down from the same period in 2004. The official declined to give further details.
Chinese airlines buy the bulk of their fuel from a domestic monopoly, China Aviation Oil (Singapore) Corp., at a price set by the government.
Beijing boosted this fixed price by 6 percent Saturday, its third increase of the year, to try to keep pace with the relentless rise in the international market price for jet fuel. The price for jet kerosene traded in Singapore has shot up 38 percent this year.
China's airlines are burdened by an inability to recoup any of their higher fuel expenses through fuel surcharges on domestic flights.
Airlines in other countries commonly apply fuel surcharges, which can contribute up to 5 percent of an airline's total revenue. Fuel is the biggest operating cost for Chinese carriers, making up almost a third of what they spend, yet China's aviation administration has rebuffed requests from several airlines that they be allowed to follow the global industry practice.
The government also makes it hard for China's airlines to moderate their fuel costs through hedging. Because of government restrictions on domestic transactions in foreign currency, Chinese airlines can hedge the fuel they consume only on overseas routes. They are therefore more vulnerable than many foreign carriers to increases in fuel prices. China's currency revaluation should generate tangible short-term gains for its airlines. Chinese carriers pay in dollars for fuel, aircraft leases and other costs totaling up to 50 percent of their operating expenses, but they earn only about 20 percent of their revenue in dollars.