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Ill-advised price hikes

(China Daily)
Updated: 2009-04-21 07:44

Chinese airlines' decision to collectively raise ticket prices does not make much sense to the market at a moment when domestic air travel has just begun to rebound.

The air transport industry in China made a record loss of 25.2 billion yuan ($3.7 billion) last year.

By offering fewer discounts under a new ticket-pricing system, Chinese airlines are now attempting to return to profit by asking passengers to pay more.

Domestic carriers' wish to avoid undercutting each other is understandable. Vicious price cutting will only make them even more vulnerable to the global slump.

However, price hikes in the form of collective action to limit consumers' choice is not the right answer to the problems the aviation sector faces.

If domestic airlines want to make themselves profitable, they need to focus on strengthening management and sharpening competitiveness.

On one hand, the astronomical loss that major Chinese carriers suffered from surging fuel costs and bad bets on fuel hedging contracts last year laid bare their poor financial management.

On the other hand, despite being the world's fastest growing commercial aviation market, China remains largely virgin land for low-cost carriers because of domestic airlines' inability to fly on small budgets.

The Chinese government has injected billions of yuan into the carriers and exempted them from a tax on fuel surcharges to help them weather through the global financial and economic crisis.

The Chinese market looks much more promising than the global market, in which passenger volumes fell by 10.1 percent year-on-year in February and 5.6 percent in January. Domestic passenger volume increased by 17.9 percent in the first quarter over the same period last year, earning Chinese airlines an estimated profit of 800-million-yuan.

Yet, all these government aid and favorable market conditions will not ensure their survival unless domestic airlines can make themselves more cost-efficient to better meet consumer demand.

Their attempt to raise ticket prices will not only reduce some domestic demand immediately but also risk pushing more passengers to an emerging competitor - high-speed rail between major Chinese cities.

As railway transportation becomes faster and more convenient in the near future, domestic airlines can no longer regard themselves as the only choice for their passengers.

Unfortunately, the collective price hikes show that Chinese airlines have yet to adapt themselves to this new reality of competition.

(China Daily 04/21/2009 page8)