It is expected that domestic airlines will achieve overall profitability in this year’s first quarter after the huge losses suffered by the whole industry since the second half of last year.
Â
Starting tomorrow, China Southern Airlines, China Eastern Airlines (CEA) and Air China will release their performance reports for 2008. Based on these previous results, the three major airlines will report their losses, and Air China and CEA in particular are facing huge losses because of their failure in derivative transactions.
Â
However, the Chinese aviation industry as a whole began showing signs of rebound entering 2009. It’s likely that the three airlines will record book profits in Q1.  It’s recently been reported in People’s Daily that domestic airlines realized profits in the first quarter, earning 800 million yuan based on preliminary estimations. On April 8, Li Jiaxiang, director general of Civil Aviation Administration of China (CAAC), said that China's civil aviation business has fully rebounded. He added that there would be greater breakthroughs in domestic markets in April and May.
Â
During the first three months of this year overall transportation turnover has increased by 1.3% over the same period last year, among which domestic passenger traffic rose by 21.3%, 17% and 15.8%, respectively.
Â
Demand for domestic air transport grew very quickly within the first quarter, driven by economic activity, increased investment and lowered fares. In February domestic passenger traffic grew by 13.5% over the same period last year and the ratio of seats occupied was about 77%, up 2 percentage points, year-on-year. Demand for domestic flights in March increased about 12%.
Â
"Data for the first two months show that the demand for the civil air transport market has reached the turning point of recovery." Zhou Chi, chairman of Shanghai Airlines, said. In December last year, the number of passengers per day for Shanghai Airlines fell below 20,000 and remained around 24,000 after the Spring Festival, while it reached over 30,000 during the Spring Festival holiday. In March the number of visitors rose steadily, and by mid-March it had reached the level of January, with an average seat occupancy ratio reaching over 75%. According to China Business News, management from Eastern Airlines disclosed that the current daily loss is less than last year, and that a few days in March even reached a draw.
Â
The reduction of fuel costs also brought a few benefits to the airlines. From April 1, the price of aviation kerosene provided by China Aviation Oil (CAO) to domestic airlines fell 460 yuan / ton over the first quarter, while in the first quarter, CAO had already reduced 330 yuan/ton. CITIC Securities analyst Li Lei said the decline of 460 yuan / ton will save around 4 billion yuan every year for the whole industry.
Â
The fare in the first two months also dropped by 10% over the same period last year, although it began to rebound in March. Li Shurong believed that it is very likely that the fare will increase in the future since in February the ratio of seats occupied of Southern Airlines, Air China, and Eastern Airlines reached 80.8%, 78.7% and 77.2% respectively, up 5.1, 0.7 and 3.8 percentage points over last February.
Â
Some analysts have pointed out the good performance in the first quarter also benefited from the growth of non-operating income, i.e. fuel hedging. Since Air China and CEA have already made provisions in hedging contracts at the low fuel prices last year in their annual reports, floating capital surpluses may appear in the first quarterly report - since the current international oil price is higher than the price was at the time of the provision. In addition, the return of aviation construction funds for the second half of the year in 2008 from the CAAC will be shown in Q1, with about 600 million yuan for Air China and 400 million yuan for Eastern Airlines and Southern Airlines respectively.
Â