May 17, 2018 / 5:15 AM / 8 days ago

Breakingviews - China's airlines are set for a long-haul price war

HONG KONG (Reuters Breakingviews) - Chinese airlines are ready to rumble. Having freed local carriers to hike fees at home, Beijing will now let them compete on long-hauls to overseas destinations. A price war to serve popular destinations is in the offing, as the Big Three - China Eastern Airlines, China Southern Airlines and Air China - fight it out. That will come at foreign rivals’ expense.

A China Eastern Airlines passenger plane taxies on the tarmac at the Hong Kong Airport at the Hong Kong Airport September 11,2013. REUTERS/Tyrone Siu

Progress in rationalizing the aviation sector has been excruciatingly slow in the People’s Republic. Military limits on where and when commercial planes fly can cause massive airport delays. A misguided policy that let cities launch municipal flag carriers swamped the market. The central government has forced the three state-owned incumbents, worth a combined $56 billion, to swallow some smaller rivals - only they then had to take on the extra employees, driving up costs.

However, the Civil Aviation Administration of China has taken a few steps in the right direction this year. In January it removed caps on fares for 300 domestic routes, which could boost average earnings by around 7 percent, according to estimates by consultancy Crucial Perspective. This week, CAAC said it would remove a long-standing “one route, one airline” rule that has prevented Chinese airlines from competing on expensive-to-serve international routes. The two moves are likely related: fatter margins at home will allow for aggressive expansion abroad.

Airline shares have outperformed in response, especially China Eastern and China Southern, which will also benefit from a hub in Beijing’s $13 billion new international airport. Shares in China Eastern are up 18 percent year to date in Hong Kong.

    According to DBS, international travel accounts for 20 to 25 percent of traffic, as measured by revenue passenger kilometres, at Chinese airlines. That’s five percentage points below the U.S. average, so there’s room to catch up. Chinese carriers have increased their international routes at a rough average of 18 percent per year since 2012, and that will only increase.

    Overseas brands that have been contentedly cashing in on China’s outbound travel boom for years will now face more state-backed competitors. With earnings already under pressure from higher fuel costs and low-cost rivals, this will hardly be welcome news.

Breakingviews

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