Jet fuel prices finally catching up in China

The Chinese government’s across-the-board move to raise gasoline, diesel and kerosene prices by around 25% last Friday has had a ripple effect across the already struggling airline industry. Chinese carriers have enjoyed a buffer from surging fuel prices thanks to generous protection by state-owned monopoly fuel prices. That is now changing and the fuel price shock could accelerate further industry rationalisation.

China Southern Airlines, which estimates the jet fuel hike will cost the Chinese airline industry an added USD2.8 billion, has quickly moved to apply to raise fuel surcharges. To cover the big increase in jet fuel prices, Chinese airlines require approximately a CNY70 increase in surcharges, according to some analysts, although two much more aggressive proposals have reportedly been put forward by China Southern:

Proposal 1:

  • <800 km sectors: CNY80 per sector increase;
  • >800 km sectors: CNY130 per sector increase.

Proposal 2:

  • <800 km sectors: CNY100 per sector increase;
  • >800 km sectors: CNY150 per sector increase.

Current surcharges, which have been in place since Sep-06, are as follows:

  • <800 km: CNY60 per sector;
  • >800 km: CNY100 per sector.

The government is unlikely to approve 130-166% increases in the surcharge in the interest of containing the inflationary impact on the economy and the possible hit on demand, especially in the weeks leading up to he Olympics. Air travel in China contracted for the first time last month since SARS, mainly due to the effects of the Sichuan earthquake.

China Southern Chairman, Liu Shaoyong, has also called for urgent changes to flight paths for the upcoming weekend charter services across the Taiwan Strait. Mr Liu stated the detour via Hong Kong airspace will lead to longer journeys and higher fares, adding, “it's unreasonable and a huge waste of resources and passengers' time”.

Air China, which has strong international partnerships, is better positioned to weather the storm than its rivals China Southern and China Eastern. The Beijing-based carrier, which operates around 57% of its total capacity (relying on codeshare partners for the remainder), has just announced a new codeshare deal with Star Alliance partner, US Airways.

Asia Pacific and Middle East airlines’ own operating capacity (seats per week) as a proportion of total capacity (%): Week commencing 23-Jun-08

Source: Centre for Asia Pacific Aviation & OAG

China Southern and China Eastern could reduce their fuel price exposure by cooperating with partners to shoulder some of the burden of flying. In this regard, China Southern, with its SkyTeam links, is better placed than China Eastern, which remains outside the alliance fold and whose equity alliance with Singapore Airlines was rejected by shareholders at the start of the year.

The apparent alternative - to be subsumed into Air China - may now be an inevitable outcome.

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