Air traffic declines in China and India

14 Oct 2008

1

New Delhi: Domestic and international air traffic in India and China has continued to drop even during the current festive season in the subcontinent that has traditionally been one of higher traffic volumes. However, the outlook seems marginally brighter for the future despite growing costs.

Data revealed by the Airport Authority of India (AAI) and the Centre for Asia Pacific Aviation (CAPA) shows that the percentage year-on-year domestic traffic growth rate in India continued to fall since November last year, standing at around minus 15 per cent as of July 2008 as compared to plus 10 per cent at the same time last year. However, the growth rate for international traffic in India has remained positive, hovering between 10 and 20 per cent.

In its report, CAPA said even as the masses in China and India are on holidays this week, coinciding vacations are not the only similarities between the emerging aviation powerhouses. 

Both nations have witnessed deep downturns in air traffic this year as state-controlled fuel prices have increased, forcing up the cost of travel. 

CAPA says that for price sensitive travellers who had just started to embrace air travel as a viable alternative to arduous ground transport modes, they were effectively priced out of the market.

China had the Olympics and associated security clamp-downs, which, like India's infrastructure bottlenecks, placed an additional burden on air travel. Travel agent commissions are also being wound down to zero (from 01October 2008 in China and 01 November 2008 in India), which is creating serious disruptions to traditional distribution channels in both countries.

Airlines in both countries have struggled financially this year; although China's carriers had bigger currency gains than their Indian counterparts that helped cushioned the traffic downturn. 

But for airlines in both countries, the last two to three months have seen currency markets change course, which will exert even greater pressure on earnings in the latter part of the year.

Offsetting that will be fuel price reductions, though carriers could be excused for feeling short-changed in recent movements by state-controlled suppliers. 

China cut its 2008 fourth quarter fuel price by 6.9 per cent following a 39 per cent hike on 08 July 2008. 

Indian Oil cut domestic jet fuel prices by 5.4 per cent on 01 October 2008, following a 16 per cent reduction on 01 September 2008. World oil markets have fallen by considerable greater amounts.

Overall, says CAPA, further pressure on airline earnings is expected in China and India over the short term, even though the traffic outlook for both countries looks set to improve as the holiday and festival seasons commence. 

On the other hand, competitive tension in both countries should ensure pricing remains keen, as fresh capacity enters the market. Air India, for example, has failed to match Kingfisher and Jet Airways in hiking its fares this month – a sign it is seeking to improve its flagging market share and raise more revenue. 

India's low cost carriers are also standing on the sidelines, but all Indian carriers are holding onto their fuel surcharges – for now.

Chinese airlines are concerned about the outlook. 

China Eastern's Board Secretary, Luo Zhuping, stated recently the biggest problem the airline is facing is the ''continuous decline of domestic demand''. He added, ''the winter is coming and uncertain economic prospects make it difficult for domestic demand to rebound in the short term''. 

Air China's chairman Kong Dong also stated last month that although oil prices have fallen below $100 per barrel, ''uncertainty grows on demand for air travel'', while China Southern's chairman Liu Shaoyong warned in August 2008 that the airline was entering a ''long period of hardship''.

''Consolidation'' is not a silver bullet in either market as the experience of recent mergers in China and India have shown.

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