05-May-2011 10:40 AM

Taiwan’s airlines optimistic of improved second quarter after weaker profitability in 1Q2011

Analysis

China Airlines, Taiwan's largest air carrier, and EVA Airways, its second largest, separately stated they are optimistic of improved second quarter results on the back of rising demand for passenger and cargo services, after reporting substantially weaker profitability in 1Q2011, predominantly linked to rising fuel costs.

The carriers stated demand on US and European routes is rising, as is cargo business to Japan to aid the post-disaster reconstruction. However, rising fuel costs, which account for 40-45% of the carriers' expenses, remains a concern.

China Airlines sees 'good change to return to the black' in 2Q2011

China Airlines spokesman Hamilton Liu, speaking to the Taipei Times, stated the carrier has "a good chance to return to the black this quarter". The carrier "expects cargo revenue to rebound in the second quarter amid Japan's additional demand for post-disaster reconstruction. Japan's recovery pace is fast and its post-disaster reconstruction will bring additional demand for transporting goods and materials, further driving up the company's cargo revenue." Separately, China Airlines CFO Roger Han also stated the carrier may be able to make reduce fuel costs amid a recent surge in the New Taiwan dollar against the US dollar.

Meanwhile, China Airlines Chairman Chang Chia-Juch has stated the carrier expects to report a decline in profit for the six months ending 30-Jun-2011 from the TWD6400 million (USD217 million) it reported in 1H2010. However, the carrier's Chairman stated that while the carrier's profit in 1H2011 will fall below 1H2010, 2H2011 results will depend on the price of oil. He also cautioned that oil prices could hit a record high of USD147 per barrel this year but expects oil to fall slightly in the second half of this year and the aviation industry to rebound.

EVA Air passenger business to 'be up' in 2Q2011

EVA Air spokesman Nieh Kuo-wei, also quoted by the Taipei Times, similarly stated that the "passenger business will be up in the second quarter, especially in June, as overseas students and their parents increase demand on US and European routes during the commencement season". Individual travel for Chinese tourists, likely to be introduced in Apr-2011, would be another driver for second-quarter passenger revenue, Nieh said. The spokesman also stated cargo would remain the main driver of the company's revenues in the second quarter amid stronger seasonal demand.

EVA Air profits plummet in 1Q2011. China Airlines falls into red

In the three months ended 31-Mar-2011 (1Q2011), EVA Air and China Airlines reported single-digit revenue improvements, which was outpaced by double-digit increases in operating costs. The results were based on filings on the Taipei Stock Exchange. China Airlines operating revenues increased 1.1% to USD1.1 billion, outpacing a 13.4% increase in operating costs to USD1.0 billion. EVA Air reported a 7.3% increase in operating revenues to USD942.3 million and a 10.7% increase in operating costs to USD842.8 million.

China Airlines reported a first quarter net loss of USD13.2 million, compared with a profit of USD89.1 million in 1Q2010. The carrier had previously stated it had expected to report a profit of less than TW1000 million (USD34.6 million) in the period due to the rising cost of fuel. The carrier stated its fuel costs had increased by close to TWD3000 million (USD103.9 million) in 1Q2011. EVA Airways posted a 70% decline in net profitability to USD14.5 million.

EVA Air and China Airlines financial highlights for three months ended 31-Mar-2011

USD (millions)	EVA Air	Y-o-Y change	China Airlines	Y-o-y change
Operating revenues	942.3	+7.3%	1098	+1.1%
Operating costs	842.8	+10.7%	1029	+13.4%
Operating expenses	63.5	+13.8%	75.3	-19.5%
Operating profit	36.0	-41.6%	(5.7)	^
Net profit	14.5	-69.7%	(13.2)	>
Total assets	5450	-3.0%	7035	-4.4%*
Cash and cash equivalents	555.7	+41.6%	344.9	+23.7%*
Total liabilities	3907	-9.9%	n/a

Revenue improvements in Mar-2011 on stronger cargo momentum

Separately, China Airlines reported a 1.7% year-on-year increase in sales revenue to TWD11,285 million (USD390.8 million) in Mar-2011. Passenger revenue increased 4.0% to USD309.4 million and cargo revenue declined 0.4% to USD166.0 million. For the first three months of 2011, the carrier's sales revenue increased 1.1% to TWD31,550 million (USD1093 million).

China Airlines' operating revenue (2009 to 2011)

China Airlines' operating revenue (cargo revenue) (2009 to 2011)

China Airlines' operating revenue (passenger revenue) (2009 to 2011)

EVA Air reported a 1.6% year-on-year increase in sales revenue to TWD8412 million (USD291.3 million) in Mar-2011. Passenger revenue increased 4.7% from Feb-2011 levels to USD155.0 million and cargo revenue increased 41% from Feb-201 levels to USD118.0 million.

EVA Air's operating revenue (2009 to 2011)

EVA Air's operating revenue (cargo revenue) (2009 to 2011)

EVA Air's operating revenue (passenger revenue) (2009 to 2011)

Yield growth in Mar-2011

In Mar-2011, both EVA Air and China Airlines reported double-digit passenger yield growth and single digit cargo yield growth. Passenger yields were stronger at EVA Air while cargo yields were stronger at China Airlines.

EVA Air's yield (passenger yield) (2009 to 2011)

EVA Air's yield (cargo yield) (2009 to 2011)

China Airlines' yield (cargo yield) (2009 to 2011)

China Airlines yield (passenger yield) (2009 to 2011)

EVA Air handled 422.835 passengers in Mar-2011, a 8.7% year-on-year reduction, with the larger China Airlines also reported a passenger decline, of 4.7% to 903,943. Both carriers also reported passenger load factor declined: 8.1 ppts to EVA Air to 75.7% and a 3.6ppt load factor decline for China Airlines to a stronger 78%.

EVA Air and China Airlines traffic highlights for Mar-2011

USD	EVA Air	Y-o-y change	China Airlines	Y-o-y change
Passenger numbers	522,835	-8.7%	903,943	-4.7%
Passenger load factor	75.7%	-8.1 ppts	78%	-3.6 ppts
Passenger yield (USD cents)	8.23	+12.5%	8.09	+12.8%
Cargo volume (tonnes)	73,919	+2.3%	n/a	n/a
Cargo load factor	83.6%	-1.5 ppts	70.5%	-3.3 ppts
Cargo yield (USD cents)	26.66	+0.8%	29.48	+8.2%

These graphics are produced using CAPA's new on-demand monthly airline traffic database, now covering dozens of LCCs worldwide and more than 130 carriers in total. Sign-up for a free trial today.

China Airlines this month also reported its preliminary passenger load factor reached 79% in Apr-2011, which is 1ppt higher than its 1Q2011 load factor of 78%. The carrier estimates a 62% load factor on its Japan services, which it expects to increase to 75% in May-2011, based on forward bookings.

China Airlines considers investor to help finance fleet expansion

Looking forward and China Airlines Chairman Chang Chia-juch stated the carrier may seek strategic investors to help finance a planned 25% fleet expansion.

The carrier's goal over the next five to 10 years is to become an "international airline" and to achieve that goal, the carrier must expand its fleet from 66 to more than 100 aircraft within ten years. The carrier plans to introduce 20 new A350s and replace six A340s by 2015. China Airlines and Mandarin Airlines will have a combined fleet of 80 leased aircraft by early 2011 and China Airlines has already ordered 14 A350-900s, which are expected to be delivered by 2015.

China Airlines needs to raise capital to expand its fleet, Mr Chang said. The airline's registered capital is set at TWD52 billion (USD1.68 billion) and real paid-in capital is TWD46.3 billion (USD1.49 billion), with the gap of TWD5.7 billion (USD183.87 million) being the capital increment and inadequate for future expansion, he said.

Chang Chia-juch added that the airline would look for partners to help improve operations and management. The carrier is in initial talks with international airline companies. Cultural compatibility and complementary flight routes will be two key factors in the carrier's search for a strategic partner or partners, Mr Chang said. He declined to say which companies it would seek tie-ups with or how large a stake it may sell. Singapore Airlines spokesman Nicholas Ionides stated the carrier is not considering such a tie-up. In 1999, China Airlines was in discussions on an agreement to sell as much as 25% to Singapore Airlines although the agreement collapsed amid opposition from China Development Bank.

The carrier's board of director have also approved a plan to sell TWD6 billion (USD204 million) in five-year secured bonds at an interest rate of 1.35% to help repay debt.