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Chinese airlines face downturn

(Agencies)
Updated: 2008-05-14 15:02

China's previously buoyant airline sector faces a major downturn due to slowing domestic and global traffic, as well as ever-rising oil prices, Citigroup said.

The brokerage has slashed its 2008-09 earnings estimates on Air China and downgraded the flag carrier's shares in Hong Kong to "sell" from "hold", while China Southern is kept at "sell".

China Eastern's H-shares, however, remains a "hold" because it is still an acquisition target, analyst Ally Ma said in a note.

In April, Air China reported little change in traffic volume from a year ago, and its passenger load factor fell for the second consecutive month. China Southern posted only a 6 percent increase in traffic growth and the upward trend in its passenger load factor since 2006 has ended, Ma said.

"April underscores our concern of a significant slowing in Chinese air travel...China's air traffic may have grown only 6-7 percent in March/April against 17 percent in 2007, while load factors are also easing," she said.

International air traffic is also declining. According to the International Air Transport Association (IATA), adjusted global air passenger traffic slowed to 4 percent in the first quarter, only half the rate of late 2007, Ma said, adding that the deterioration coincides with a peak in aircraft deliveries.

"The IATA expects 1,231 new aircraft deliveries in 2008, which may compress yields by 4.1 percent," she said.

Meanwhile, oil prices have risen 63 percent this year, which will impact Chinese carriers despite price controls.

"The buffer from domestic fuel price controls is unsustainable and could be a major share price overhang," Ma said.

Citigroup has cuts its price target on Air China to HK$4.2 ($0.54) from HK$6.4. Air China's shares were down 2.67 percent at HK$5.46 this morning in Hong Kong.

The brokerage has also slashed its price target on China Southern to HK$3.45 from HK$4.7. The carrier's shares were down 0.21 percent at HK$4.84.

Meanwhile, China Eastern's target price has been cut to HK$3.8 from HK$4.3. The Shanghai-based airline's shares were up 0.6 percent at HK$3.34 this morning.