Chinese Airlines Report Losses As High Oil Prices Eat Up Margins

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Updated August 4, 2006 – 12:06pm

Chinese airlines reported losses of 2.57 billion RMB (US $320 million) in the first half of 2006, a decline attributed to the rise in oil prices to nearly $80 a barrel, a spokesman from the General Administration of Civil Aviation (CAAC) said on July 25. China’s civil aviation sector experienced a total loss of 640 million RMB ($80 million) in the first six months of the year, $225 million more than in the corresponding period last year. While airline expansions led business income to increase 18 percent over last year, to nearly 71.7 billion RMB ($8.96 billion), operating costs reached 73.6 billion RMB ($9.2 billion) resulting in the net loss of 2.57 billion RMB ($320 million), CAAC told Xinhua News Agency.

Competition among Chinese airlines became fierce in early 2006 as operating costs soared with the high price of fuel. Experts commented that although China’s aviation sector has experienced rapid development in recent years, rising costs and other negative factors are dramatically affecting the market and industry. Amid rising competition, domestic airlines are being forced to drive down fare prices to attract customers, further restricting their business income and making it harder to turn a profit, insiders said.

To make up for their losses, the airlines are expected to continue raising fuel taxes—additional surcharges that are passed on to passengers through higher ticket prices. As of July 25, the fuel tax for Sino-Japan routes had jumped to $25 from $7, and this surcharge now accounts for as much as 25–30 percent of the total ticket price. Carriers with Sino-U.S. routes have begun charging a $20 fuel surcharge. Taxes have also increased for several routes from mainland China to Hong Kong.

Giovanni Bisignani, Director General of the Montreal-based International Air Transport Association, warned that the skyrocketing price of oil would cause additional losses of $2.2 billion across the global aviation industry. The industry may even have difficulties breaking even by 2007, a factor that will depend largely on aviation fuel prices, Xinhua News reported Bisignani as saying.

Nevertheless, global air passenger traffic continues to grow rapidly. As of April, global traffic had increased 9.9 percent over last year, with average seat occupancy reaching 76.5 percent—the highest level in the last decade, according to Xinhua News. China's overall aviation traffic reached 25.8 billion tons per kilometer in 2005, ranking it second in the world after the United States, reports CAAC.