Air China expected to remain leading carrier

Updated: 2007-01-16 14:33

Beijing - Air China is expected to remain the country's most profitable carrier this year while the rest of the pack battles it out in a fast-growing but increasingly competitive market, analysts said.

The flag-carrier will once again lead China's "big three" thanks to its extensive international network and hub in Beijing that will see traffic volumes grow as the 2008 Olympics nears, they said.

"Air China will still outperform the market. It is the most profitable airline in China and this trend will continue in 2007 and especially 2008," Guotai Junan analyst Alan Lam said.

Its two main rivals, however, China Eastern and China Southern, which operates the largest fleet, are expected to struggle amid increasing competition from low-cost and regional carriers.

China is the world's fastest-growing air travel market, with 160 million passengers last year, up 15 percent from 2005, according to previous state press reports.

The increase saw Air China carry 31.5 million passengers last year, up 13.7 percent, and is reaping the benefits of a tie-up with Cathay Pacific which dramatically increased traffic on Hong Kong-China routes.

It booked a net profit of 3.34 billion yuan (US$428 million) in the nine months to September.

China Eastern struggled given heightened competition and higher fuel costs, posting a loss of 970 million yuan in the first three quarters of 2006.

Analyst said the airline could get a boost from Singapore Airlines' if a rumoured 20-percent stake investment in the carrier this year were to go through.

Nevertheless, the benefits for China Eastern are not expected to be as great as Air China's tie-up with Cathay Pacific, and the Shanghai-based group is expected to stay in the red this year, analysts said.

"The synergies between Singapore Airlines and China Eastern might not be as significant ... they do not have so many duplicate routes, whereas Cathay and Air China both have large volumes between Hong Kong and the mainland," Morgan Stanley analyst Edward Xu said.

Amid easing fuel prices, competition on key routes will only rise, as Air China expands its operations into Shanghai, China Eastern's base.

Guangzhou-based China Southern, meanwhile, carried 49.2 million passengers in 2006, up 11.5 percent, and posted a net profit of 453 million yuan through the first three quarters.

However, results would have been better if not for a loss of nearly one billion yuan in the first half.

Its massive capital expansion plans for 2008-2010 -- it will take delivery of 50 new Airbus aircraft at a cost of 3.32 billion dollars -- also face trouble due to financial difficulties which have slowed a share reform plan.

"China Southern cannot progress with its share reform plan ... under the circumstances, it is unlikely foreign investors will buy a stake in the airline," said Lam of Guotai Junan.

The group could however gain from government plans to promote internal routes since it is the most domestically focused of the big three.

Morgan Stanley's Xu said China is expected to take delivery of 155 new jets this year, many for use on domestic routes where competition is heating up from low-cost and regional carriers.

But these carriers also face a series of challenges.

Rising incomes in China are spurring travel but the main markets will remain Beijing, Shanghai and Guangzhou, where the big airlines are firmly entrenched.

The ability of budget airlines to offer discounted fares is also restricted -- Spring Airlines was fined last month for selling tickets at prices lower than government-set levels.

"I do not expect the new entrants to the market to make the sort of impact they have had in the US, Europe or Malaysia," said one industry analyst, asking not be named.

Morgan Stanley's Xu added that low-cost carriers should concentrate on a few key routes with high load factors to survive.

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