Potential versus reality

Yet, as everyone in the airline business knows, increasing passenger numbers don’t necessarily translate into profits. And that’s exactly how this year is panning out for Chinese airlines. In the first six months of 2018 the combined net income of the country’s big three – Air China, China Eastern and China Southern – has plunged more than 50 per cent to around A$1 billion.

This isn’t because of poor management. It’s the result of double-edged sword in the shape of rising fuel costs and a depreciation in the local currency – the Yuan – against the US dollar. The price of jet fuel in Asia is now around A$124 a barrel, some 40 per cent more than it was twelve months ago. That’s a particular issue for Chinese airlines – fuel represents more than 30 per cent of their costs – because they don’t hedge their fuel, a measure that allows carriers elsewhere to lock in the price at a specific level and protect against rises.

Currency has also become an issue because the Chinese Yuan declined more than 5 per cent against the dollar in the second quarter amid a slowing domestic economy and escalating trade tensions with the US. A weaker Yuan weighs on profit as domestic routes account for about 70 per cent on average of the China-based airlines’ revenue, yet they pay for major expenses in dollars.

On the upside, the government did in May ease a regulation to allow higher ticket prices on certain domestic routes, a move that helped airlines yields, though not enough to eliminate to impact of fuel and currency fluctuations.

Interestingly, local Chinese airlines aren’t the only ones suffering. Ironically, market conditions are also proving to be a little severe for some foreign airlines which not long ago were scrambling to gain more access to China. American Airlines, the largest US carrier into China by passenger numbers, chopped its Chicago to Beijing service in May and has now decided to pull out of the Chicago to Shanghai route in October.

‘Interestingly, local Chinese airlines aren’t the only ones suffering. ’

The service is not sustainable with high fuel costs, said Vasu Raja, American’s vice president of network and schedule planning.

“We have opportunities to be successful in other markets.”

Hawaiian Airlines is also suspending its thrice-weekly nonstop service between Honolulu and Beijing.

“These decisions are never easy and this one is especially difficult because we believe in China’s future as a robust market for the Hawaiian vacation experience and we will continue to market one-stop options to Honolulu from cities throughout China on our airline partners,’’ said Peter Ingram, Hawaiian’s president and chief executive.

Fuel costs aren’t the only problem causing these changes in the market. Earlier this year the CAAC eased a decade-old “one route, one airline” policy for Chinese airlines. This had meant that, for example, Beijing-based Air China could only operate from Beijing to the US and not from Shanghai to the US, a route reserved for China Eastern. Now, the three big Chinese carriers can operate trans-Pacific flights from all of the big three hubs, Beijing, Shanghai and Guangzhou.

The result: far more competition on long-haul routes. As United Airlines President Scott Kirby said at a recent aviation forecast summit in Denver: “We’ve had several years of weakness as there was an awful lot of capacity growth out of Beijing and Shanghai.”

The easing of the “one airline, one route” policy has put US carriers at a severe disadvantage. Chinese passengers arriving at US airports are expected to nearly triple from 4.3 million in 2018 to an estimated 12.8 million in 2024 but most of that increase is now expected to be gobbled up by Chinese airlines.

It does seem strange that major airlines are putting the breaks on or even reducing services to China which, after all, is at the centre of global air traffic growth. Instead, the US majors – United, Delta and American – are switching their attention to Europe, adding more frequencies there over coming months. Once again, it all shows how susceptible airlines and their markets are to factors outside their control, such as the price of fuel and currency fluctuations.

No doubt the Chinese market will eventually reach its full potential but in the meantime, for airlines at least, there’s no point in continuing to fly on routes that aren’t making money.