China's state airlines find out home is where the profits are
For years, China’s three state-owned airlines kept adding flights on international routes to chase after the expanding middle class. Now, they are slowing that down in favor of the local market.
In the first half of 2017, Air China Ltd., China Eastern Airlines Corp., and China Southern Airlines Co. increased international seats at less than half the pace of the same period last year, according to data from the carriers. Two of them have stepped up domestic capacity.
The pullback on overseas routes may be a sign that Chinese airlines are eschewing aggressive expansion and paring cheaper tickets on long-haul flights from smaller cities to destinations like New York and Sydney. Local passenger traffic rose as much as 16.7 percent in May -- the most in more than two years -- and grew more than twice the pace of international services in the first six months, data from Civil Aviation Administration of China show.
“If you look at margins, our forecast is that domestic is more profitable,” said Andrew Lee, an analyst at Jefferies Group LLC. “If there’s a bit more focus on the domestic side, that would be more positive for yields."
Investors will be closely watching the carriers’ domestic yields, an indicator of profitability measured by the money earned from flying one passenger per kilometer, as the three carriers release first-half earnings this week. Shanghai-based China Eastern may report a 28 percent jump in net income to RMB 4.1 billion (USD 617 million). Beijing-based Air China’s profit probably rose 9 percent to RMB 3.8 billion and Guangzhou-based China Southern may say profit declined 6 percent to RMB 2.9 billion, according to the median estimates in a Bloomberg survey of three analysts.
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