Chinese Airlines Suffer From Weakening Economy

By Bradley Perrett
Source: Aviation Daily
August 28, 2013

Demand for Chinese domestic air travel is looking sickly. China Southern, reporting a surprisingly large 10% drop in passenger yield for the first half of 2013, complains that competition has become all the more fierce because of slowing demand, “rapidly increasing capacity of the airline industry” and expansion of the national high-speed rail network.

One factor that China Southern does not mention is one that would occur to almost any passenger: the increasing unreliability of Chinese airline services, encouraging travelers to look for alternative means of transportation, or deterring them from leaving town at all. An explosion of media coverage of this issue over the past few months does not augur well for future demand.

China Southern is the most domestically focused of the three big Chinese carriers. The most internationally oriented, Air China, reports a 15% fall in domestic yields for the same period, even as pricing for its services to other countries has held steady.

“The economy has probably slowed faster than the airlines expected when they placed their aircraft orders,” says ICF SH&E analyst Guo Yufeng. For this year, he suspects, the airlines set their capacity on the basis of central government forecasts for economic growth that turned out to be optimistic.

The main Chinese airlines are controlled by the central government, giving them an incentive to follow official guidance in planning their operations.

Gross domestic product in China grew 7.5% between the second quarters of 2012 and 2013, well below the rates of 10-11% commonly seen until a few years ago — and more or less permanently so, in the opinion of most economists.

Indeed, China Southern’s figures, if taken as an economic indicator, suggest the country’s business environment may be weaker than generally thought. China Southern carried 6.5% more passengers in the first half of this year than it did a year earlier.

For an economy at China’s modest stage of development, with national income of only about $6,000 per person, air traffic should be rising somewhat faster than GDP.

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