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Domestic airlines slash fares to raise yields
( 2003-07-03 09:52) (China Daily HK Edition)

China's embattled airline industry is striving for a recovery from the outbreak of SARS (severe acute respiratory syndrome) with domestic airlines launching price wars to maximize yields.

A man walks into a airplane and train ticket office in Wuhan, Central China¡¯s Hubei Province, in this photo taken in January. Airlines are slashing ticket prices to lure more people to take air in the aftermath of the SARS (severe acute respiratory syndrome) outbreak. [newsphoto.com.cn]
In a desperate bid to attract passengers, cost-conscious airlines are competing to offer discount fares since the epidemic outbreak was brought under control.

After being given more leeway to decide ticket prices, domestic carriers are selling tickets with discounts of as high as 40 per cent.

But some regional airlines such as Hainan Airlines have gone further, offering discounts of up to 90 per cent.

Industrial analysts said the moves are aimed at reviving the demand for air transportation, which greatly decreased in April and May when the SARS outbreak reached its height.

But the loss-saving effort will probably prove fruitless in preventing the whole industry from flying into the red loss this year, warned both government officials and industrial insiders.

Yang Yuanyuan, director of the General Administration of Civil Aviation of China (CAAC), predicted last week that the airline sector is almost certain to face a net loss this year due to a strong battering from SARS.

Sharp drops in incomes and business losses have seen some major domestic airlines and airports running into debt, he said.

The industry was managing to recover from the negative impact of a series of incidents including the September 11 terrorist attacks in the United States and the Iraqi war as well as a global economic recession when the SARS outbreak began to deal a deadly blow.

Because of the shrinking business, all major domestic airlines were forced to cut their flights and capacity.

By the end of April, the country's top three carriers - Air China, China Eastern Airlines and China Southern Airlines - had run into a loss of 2.67 billion yuan (US$323 million), with a decline of 70 per cent in passenger load.

Since April, Air China reduced its flights by 2,100 and the figure for China Eastern Airlines and China Southern Airlines respectively reached 2,969 and 9,705.

To bail the industry out of the current woes, the CAAC unveiled a five-month relief package including tax concessions and fee cuts in May.

Although the incentives pushed profit margins of the industry by 2.5 percentage points, domestic airlines are still suffering from weak passenger demand.

At the end of June, about 70 per cent of domestic airline capacity had been restored but the seat occupancy has averaged less than 50 per cent.

So the CAAC introduced another ambitious programme on June 26 to encourage promotion activities of domestic airlines, hoping to stir a much-needed increase in demand.

The policy tool, however, has translated into a hot price war, which industry insiders say will finally plunge domestic airlines deeper into loss.

Luo Zhuping, a board member of China Eastern Airlines, said a long-term remedy for the industry lies in an overhaul of the existing administration mechanism while letting market forces play a bigger role.

He suggested that the administrator first introduce policies to help reduce exorbitant costs of domestic airlines resulting from excessively high taxes on imported materials, fuel prices for domestic flights, rents for airplanes and huge funds for infrastructure construction.

Moreover, airlines should enjoy more freedom in business decision-making so that they can do a better job in controlling costs and improving services, Luo said.

Despite huge losses incurred by the disease outbreak, Chinese airlines are forbidden from ordering any lay-offs or declaring bankruptcy.

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