Disappointing 2008 Results Expected For China’s Airlines

Citing shrinking passenger numbers and miscalculated fuel hedging contracts as primary reasons, China’s flag carrier Air China has revealed that it anticipates posting a significant loss for 2008. The announcement was made to the Shanghai Stock Exchange before the market opened for trading on Monday, although final audited results will only be released in April. This announcement proved to be especially disappointing in light of the fact that Air China was named as the sole airline sponsor of the 2008 Olympics held in Beijing, as well as joining the Star Alliance group of international air carriers during the year and therefore had expectations for a bumper year.

Air China is the country’s second largest carrier measured in terms of fleet size, with the top airline being China Southern Airlines, and China Eastern Airlines ranking at number three. Both of these carriers have confirmed that they also expect to report losses for 2008, primarily as a result of the global economic slowdown which has weakened demand. Air China’s passenger numbers fell by 1.7 percent in 2008 with its cargo and mail volume dropping by 3.8 percent. Other factors cited for losses by airlines include the devastating earthquake that rocked China’s Sichuan Province in May 2008, as well as the security-motivated restrictions placed on air travel during the Olympics. While the drop in international crude oil has assisted airlines in reducing fuel costs, Air China noted that the company had registered a loss of 6.8 billion yuan ($945 million) related to fuel hedging contracts.

Despite Air China’s poor performance during 2008, analysts are optimistic that the carrier will recover in 2009 and this optimism has carried over into the stock market with Air China climbing as much as 8 percent in Hong Kong, being its biggest gain in a month. With China’s economy currently weathering the global financial storm more successfully than most, and increased interest in trading coming from many as yet untapped markets in developing economies, analysts believe that China’s airlines will benefit in 2009 from increased travel demand, as well as lower operating costs brought about by falling crude oil prices. Speculation as to possible mergers within China’s air carrier industry will also come under the spotlight during 2009.