AMR Corporation (AMR), Continental Airlines (CAL), and other U.S.-based carriers aren’t the only ones losing money; even China’s growing economy can’t support domestic airlines like China Southern Airlines Limited (ZNH) and China Eastern Airlines (CEA).
American airlines like AMR Corporation [[AMR]] and Continental Airlines [[CAL]] have a long history of losing money, with the exception of Southwest Airlines [[LUV]], which profits in large part through effective hedging strategies. However, problems in the airline industry aren’t limited to the U.S. with similar problems overseas, even in growing economies like China where fuel prices are regulated and a lot of costs can be effectively controlled.
China Southern Airlines Limited [[ZNH]] and China Eastern Airlines [[CEA]] both reported negative earnings during the last year. The larger of the two, China Southern, lost CNY5.6 billion during the six months ending in December 2008. However, the company was profitable throughout late 2007 and early 2008, despite the economic turmoil. China Eastern Airlines, by comparison, lost money during most of its recent history, minus the end of 2007.
Most of the losses in American airlines have been blamed on higher fuel prices when times were good and slower consumer spending when times are bad. Higher fuel prices put pressure on bottom-line margins, while slower spending puts pressure on top-line results. This chronic problem could take some time to sort out as airlines look for any ways they can find to save money by cutting benefits, adding fees, and reducing routes and planes.
The problem in China is less about fuel costs – as they are state regulated – and more about reaching critical mass. Spending slowed during the last few years, which led to losses for Chinese airlines. However, cost of revenues continued to decrease as fuel costs remained steady but operations were streamlined. Meanwhile, many of these airlines are now working to build new international routes as demand is projected to grow along with a recovery.
In the end, Chinese airlines are still facing pressure, but profitability is not out of the question. Meanwhile, U.S. airlines still face a number of issues that need to be solved before they can attain consistent profitability. As a result, investors looking for exposure to profitable airlines may want to take a look at some Chinese names down the road…
CONTACT: 888-288-5215 · Please read our Full Disclaimer pertaining to this article.