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China's leading airlines warn of heavy losses in the face of an uncertain summer

China's largest airlines are facing a 'challenging' outlook for the summer peak travel season after warning of heavy 'losses' in the first half. Weaker demand has raised doubts about their ability to absorb higher fuel costs.

Air China, China Eastern Airlines, and China Southern Airlines warned on Tuesday that they expect combined first-half losses of up 9 billion yuan (1,33 billion dollars). This is a stark reversal to their combined first quarter profit, which was boosted by a strong Lunar New Year market.

These losses highlight the dilemma faced by Chinese airlines. Raising fares to cover higher fuel costs could further weaken demand, but keeping ticket prices low would leave carriers with the added expense.

Parash Jain is the global head of HSBC’s transport and logistics research. He said that a “negative wealth effect” was reshaping Chinese consumers' habits, as?economic development slowed, and every increase in airfare risked lowering consumer demand.

Jain noted that the rising ticket prices were hurting summer travel demand, and people are using high-speed rail for shorter distances. He also mentioned weather disruptions as well as a smaller pool school-aged children. "But, the most significant reason for the weaker demand has to be the higher?ticket price."

Analysts at HSBC expect China's biggest carriers to suffer combined losses of 16.8 billion yuan by 2026. This is compared to the current market expectations of a combined profit of 1.3billion yuan.

Air China stated in a filing to the stock exchange that high fuel prices have "dramatically squeezed" airline profits.

Chinese airlines, unlike many of their Asian competitors, do not hedge much of their fuel purchase, which leaves them more vulnerable to the surge in oil prices caused by the conflict with Iran. Jet fuel prices are still about 50% higher than pre-war levels, despite the fact that they have dropped from their peak in the second quarter.

Bank of America analysts stated in a report that "weak demand conditions will likely remain the main concern? heading into the summer peak period" due to the normalization of jet fuel.

Chinese airlines are usually most profitable in the third quarter. Flight Master, a data-driven aviation firm, predicts that the number of passengers carried by Chinese carriers on domestic and international routes in July and august will drop 3.6% year-onyear to 142 millions. This would be the first time since 2022 that this peak season has been reduced.

According to Flight Master, from July 1-14, the average number of flights per day decreased by 2.2% compared to last year. Domestic flights fell 1.8%, while international flights dropped 3.6%. The average economy class fare was 831 yuan. This is down 1.2% from last year and 6.1% lower than 2019 levels.

China's domestic passenger market contracted 6.2% in May, compared to a year ago, according to the International Air Transport Association. This is the lowest performance among major domestic markets worldwide and the first decline since the pandemic that was not tied to?the timing? of the Lunar New Year.

Since the beginning of the Iran crisis, the big three airlines have seen a surge in demand for European routes as travellers avoid Middle Eastern hubs that are disrupted. According to Flight Master, these gains are being eroded as Gulf carriers offer cheaper fares and restore flights.

(source: Reuters)