Stiffening competition, rising fuel prices will dampen future earnings

Shanghai-based China Eastern Airlines Corporation warned on Thursday that a turbulent business environment will put pressure on its earnings this year, despite posting a profit of 5.3 billion yuan in 2010.

At a press conference held in Hong Kong to report its earnings, the carrier cited several challenges including "intense business competition from the express passenger railway network on the mainland, oil price volatility, geo-political crises and huge natural disasters", according to China Eastern Chairman Liu Shaoyong.

The Ministry of Railways has already boosted the nation's rail network to more than 53,000 miles, including standard and high-speed rail. It will spend an estimated $300 billion to meet its 2020 goal for high-speed rail and spanning some 75,000 miles.

High oil prices is another factor that will hurt the carrier's future profitability with it currently fetching around $105 per barrel. The recent political turmoil in the Middle East and the Japanese earthquake will further curtail domestic and international demand for air travel, according to Liu.

"The carrier has already lowered airfares of certain routes, expanded more international destination networks, controlled passenger load factor stringently and enhanced our quality customer services to withstand the business competition," Liu stressed.

China Eastern's 5.3 billion yuan net profit - up 26 times on the 197 million yuan it posted in 2009 - was driven by the integration of China Eastern and Shanghai Airlines as well as opportunities brought by the World Expo 2010 Shanghai. However, the carrier did not declare any dividend payment for 2010.

China Eastern utilized 8.9 billion yuan to acquire a 60 percent stake in Shanghai Airlines in December 2009 as the combination of the two carriers ensured that they would get more than a 50 percent market share in the Shanghai aviation market.

The carrier's turnover in 2010 rose 89 percent to 73.8 billion yuan. However, the total operating expenses also jumped nearly 79 percent to 68.7 billion yuan whereas fuel costs surged 76 percent to 21.6 billion yuan.

Amid future business competition, the airline in 2011 will utilize approximately 16.7 billion yuan in capital expenditure to acquire 25 aircraft. China Eastern targeted total traffic volume to reach 13,880 million metric ton-kilometers in 2011. Meanwhile, it aims for the number of passengers to reach 70.862 million and weight of transport freight to reach 1.627 million metric tons.

"China Eastern will devote more resources to enhance its overall passenger load factor by 8 to 10 percent in the next few years," Liu said, adding that the carrier's another business strategy is to promote Shanghai as an aviation hub so as to attract more connecting business flights. In 2010, the number of passengers transferring at the Pudong hub for connecting flights reached 1.1 million.

The recent Japanese massive earthquake is affecting its passenger traffic business. However, the effects will not be catastrophic as mainland tourists can utilize China Eastern's other Asian routes for their vacations. Business traveling to Japan has not been affected by the earthquake, Liu added.

China Daily

(HK Edition 04/01/2011 page4)