China Southern Swings to Loss on Forex Fluctuation Impact

(Bloomberg) China Southern Airlines Co., the country’s largest airline by passengers carried, posted a first-half net loss after suffering the sharpest foreign-exchange loss among the three biggest Chinese carriers.

The Guangzhou-based carrier swung to a net loss of 1.06 billion yuan ($173 million) from 344 million yuan in net income a year ago, according to a Hong Kong exchange filing yesterday that’s based on international accounting standards.

China Southern cited fluctuations in the Chinese currency for its weakening profit in a statement issued last month. Air China Ltd.  and China Eastern Airlines Corp. had also issued similar warnings in July. The yuan, which weakened 2.4 percent against the dollar in the first half, will probably fall about 1 percent in the second half, according to the median of 58 economist and analyst forecasts compiled by Bloomberg.

“If the yuan’s picking up, it’s positive for airlines,” said Claire Teng, a transportation analyst at Standard Chartered Plc. ahead of the earnings release. “Chinese airlines will swing into a forex gain.”

Yield per revenue passenger kilometer fell 1.7 percent to 0.58 yuan in the first half, the airline said.

China Southern rose 2 percent in Hong Kong trading yesterday to close at HK$2.61 before the earnings announcement. The stock has dropped 14 percent this year, compared to a 6.2 percent gain in the city’s benchmark Hang Seng Index.

Passenger Traffic

The airline recorded a 1.11 billion yuan net foreign exchange loss, compared with a 1.52 billion yuan net gain a year ago, it said. That compares to a 660 million yuan foreign exchange loss for China Eastern and 721 million yuan for Air China.

China Southern’s net loss came despite year-on-year increases of 8.7 percent in operating revenue and 10.2 percent in passenger traffic volume, according to the statement.

The airline’s net loss was near the higher end of a 900 million yuan to 1.1 billion yuan range it had indicated last month. Net income reported by Air China and China Eastern was at the stronger end of guidance they had provided earlier.

Shanghai-based China Eastern reported a 98 percent tumble in first-half net income to 12 million yuan from 622 million yuan a year earlier, the company said in a Shanghai exchange statement yesterday.

Beijing-headquartered Air China on Aug. 26 said its first-half net income dropped 55 percent to 510 million yuan, compared with a forecast of a 55 percent to 65 percent decline.

Source: Bloomberg News by clement tan

Air China Profit Dips as Weak Yuan Compounds Debt Burden

(Bloomberg) Air China Ltd., the country’s largest airline by market value, posted a 55.4 percent drop in profit in the first six months of the year as a weaker yuan inflated overseas debt payments.

Net income declined to 510 million yuan ($82.9 million) in the six months ended in June from a year ago based on international accounting standards, the Chinese flag carrier said in a statement to the Shanghai stock exchange. The profit was in line with the 55 percent to 65 percent decline forecast by Air China on July 14.

The yuan fell more than 2 percent against the dollar in the first half of this year, driving up costs for Air China, which has 70 percent of its debt denominated in the greenback at the end of 2013. Foreign exchange losses are expected to also weigh on the earnings of China Eastern Airlines Corp. and China Southern Airlines Co., which are slated to report first-half results later this week.

“Chinese airlines’ earnings are very sensitive” to the exchange rate, Patrick Xu, a Hong Kong-based airline analyst with Barclays, said in a note dated Aug. 20. “The earnings impact mainly comes from marking-to-market U.S. dollar-denominated debt and hence is mostly non-cash.”

Air China shares fell 1.8 percent to close at HK$4.88 in Hong Kong before the earnings announcement. The stock has dropped 16 percent this year, compared to a 7.6 percent gain in the benchmark Hang Seng Index.

Exchange Loss

The Beijing-based carrier said it booked a net foreign exchange loss of 721 million yuan in the first six months this year, compared with a 1.1 billion yuan net gain in the year earlier period.

Air China’s net gearing ratio stood at 71.8 percent at the end of June, almost unchanged from end-2013, the statement showed. Its passenger yield, a measure of sales per seat per passenger mile, declined 1.7 percent to 0.59 yuan, the country’s third-largest airline by volume said in the statement.

The carrier served 40.14 million passengers in the first six months, 7.2 percent more than a year earlier, according to the statement. Overall load factor was 80.6 percent, compared with 81.1 percent a year ago, it said.

Source: Bloomberg News by Clement Tan

BOC Aviation orders Boeing planes worth $8.8 billion

(Reuters) - BOC Aviation, the leasing arm of Bank of China, has placed the biggest order in its 20-year history for 80 Boeing medium-haul passenger planes, weeks after lessor SMBC Aviation ordered 115 Airbus jets.

The shopping spree by leasing companies comes as they ride a boom in aviation financing and see strong demand from airlines. Seeking to keep lean balance sheets, airlines are increasingly turning to lessors to upgrade fleets to fuel-efficient aircraft.

Singapore-based BOC Aviation, one of the world's leading lessors, said the order was for 50 Boeing 737 Max 8 planes and 30 Next Generation 737-800 aircraft, which will be delivered from 2016 to 2021.

The order, which also includes two 777-300ER long-haul wide-body planes, has a value of $8.8 billion at list prices, Boeing said. Last month, SMBC placed an order worth about $11.8 billion for Airbus planes. Buyers typically receive an undisclosed discount on the listed prices of jets.

The order is part of BOC Aviation's strategy to build its fleet for the next seven years. The company had a fleet of 251 delivered aircraft as of June 30. 

"Following the successful placement of the 50 Next Generation 737 aircraft that we ordered in 2006, this is a continuation of our commitment to be responsive to airline customers which are expanding or replacing older fleets," said Robert Martin, managing director and CEO of BOC Aviation.

Asia-Pacific is the top region for aviation growth. The region's customers are expected to buy about $2 trillion worth of planes over the next 20 years, or 39 percent of global sales of $5.2 trillion, according to Boeing's latest forecast.

Lessors such as BOC Aviation place their aircraft with airlines globally, and are increasingly important customers for the plane makers as their share of global fleets grows.

The order for the upgraded, re-engined variant of the Boeing narrow-body jet follows BOC's deal for 43 of Airbus Group NV's A320 family of aircraft, including seven of the re-engined A320neo planes, at the Farnborough airshow in July.

Source: Reuters by Anshuman Daga 

Chinese Are Traveling More, Shopping Less

(WSJ) Sellers of expensive handbags, jewelry and wine have feasted on Chinese buyers. The banquet is over now.

Zhiyuan Zhuang, an assistant store manager at a Bottega Veneta shop in Milan, remembers the boom times through 2012, when the first wave of Chinese shoppers were a ray of sunlight amid the gloomy European economy. "We used to have older clients accompanied by their translators who would buy without thinking as if they were not spending their money," Mr. Zhuang said.

"They have disappeared now," he added. "Now we are seeing more young couples who pick and choose."

Dora Tao is typical of a more sophisticated Chinese traveler. The 38-year-old accountant from Shanghai used to buy things for her friends, family and colleagues when she traveled to Germany for work. "I bought at almost every luxury store on the main shopping street in Frankfurt, mainly for other people," said Ms. Tao. Her purchases included Louis Vuitton scarves for business associates, bought on behalf of a friend, and German cooking pans and Cuckoo clocks, which her relatives wanted.

But this summer when she took her family and parents to Austria, the Czech Republic and Germany, they went to a concert at Vienna's Golden Hall and tried rafting for the first time. They shopped only to pick up some medicines they can't find in China.

Ms. Tao's changing tastes are typical of Chinese shoppers. More Chinese than ever are traveling abroad, but they are shopping less.

Almost 100 million Chinese took trips abroad last year, accounting for 9% of international trips outside China, according to the World Tourism Organization. They outspent travelers from other countries, accounting for 27% of the value of all tax-refund claims made in 2013 with Global Blue, which processes refunds at airports for shoppers visiting from abroad.

But the shopping craze is losing its momentum. Tax-refund claims by Chinese tourists in Europe grew just 18% in 2013, compared with 57% in 2012, said Global Blue.

"The Hong Kong market is weak and so is Western Europe," said Erwan Ramboug, author of "The Bling Dynasty: Why the Reign of Chinese Luxury Shoppers Has Only Just Begun."

"This might seem unimportant if Chinese travelers are simply shopping in different cities," added Mr. Ramboug, a co-head of global consumer and retail research at HSBC. "However, not all sales that have been lost from one market are being recouped in another." He still believes in the long-term buying power of Chinese consumers but advises investors to stay away from luxury stocks for the moment.

Luxury-goods sellers and industry analysts give different reasons for the weakness. They cite Beijing's anticorruption campaign, the strong euro and tension between Hong Kong and mainland China, which is keeping tourists away and hurting luxury-goods sales in the Chinese territory.

Prada Group said revenue in Europe fell by 1% in the first half of the year, partly due to the fall in tourism volume from China. LVMH Moët Hennessy Louis Vuitton SA blamed an "unfavorable currency environment" for its weak results in Europe during the same period.

In Hong Kong, mainland tourist arrivals fell 2% year on year during a May holiday that is traditionally a huge shopping period. Fewer mainland tourists contributed to a 6.9% year-on-year decline in June retail sales in Hong Kong, while sales of jewelry, watches and other luxury goods plunged 28%.

Some retailers blame the decline on a souring relationship between Hong Kong and mainland China, which has led to protests against mainland tourists in front of some shops. "You shouldn't underestimate the impact of those people in groups of two or three, in front of your shops chanting, 'We don't want your money, just go back home,' " said Francis Belin, head of Swarovski's Asia consumer-goods business. "This has gone viral."

But there is a simpler—and, for the luxury-goods industry, more worrisome—explanation. Chinese are refusing to pay inflated prices for luxury products. The trend is just starting, but it could weigh on profits even if sales rebound.

Luxury goods have long been more expensive in China than abroad, creating an incentive to shop overseas. That price gap is closing. In February 2013, premium handbags were on average 50% more expensive in China than in Europe, according to Luca Solca, the head of luxury goods at Exane BNP Paribas. Now, they are 40% more expensive. The portion of the markup that can't be explained by China's import duties is largely gone.

The gap between Hong Kong and mainland China is even smaller, as retailers mark up prices in Hong Kong in response to higher rents. In 2013, the price of a classic Chanel quilted bag rose by 31% in Hong Kong but just 10% in Shanghai, according to brokerage firm CLSA. As a result, a bag that was 20% more expensive in Shanghai than in Hong Kong is now about the same price.

As China's big spenders disappear, those prices have nowhere to go but down.

Source: Wall Street Journal 

Beijing Capital International Airport Profit Flat in First Half

(WSJ) Beijing Capital International Airport Co.'s first-half net profit was flat, capped by slower air-traffic growth and limited handling capacity at the overcrowded gateway.

The Hong Hong-listed company, which operates the airport in the nation's capital, said net profit for the six months ended June 30 rose 0.6% to 677.7 million yuan ($110.2 million) from 673.3 million yuan a year earlier. Its revenue rose 4.8% to 3.7 billion yuan from 3.53 billion yuan.

Air-traffic volume growth at Beijing Capital Airport has been slowing in recent years as the nation's busiest airport by passenger throughput is running well beyond its designed capacity of 76 million passengers a year.

The airport handled 1.9% more passengers, for a total of 41.6 million, in the first half of the year, following 2.2% growth for all of 2013 to 83.71 million passengers. That made it the world's second busiest airport after Hartsfield-Jackson Atlanta International Airport in the U.S.

The weak first-half earnings also come after the Chinese government in May unveiled a plan to build a $14 billion airport on the outskirts of the nation's capital to relieve congestion at Beijing Capital Airport. 

Set to open in 2018, the airport will have four runways in its first phase and will be able to handle nearly as many passengers as Beijing Capital Airport, with provisions for three additional runways as needed.

The company said in a statement that slower economic growth, political uncertainty in some regions and a decrease in air travel demand to Southeast Asian countries following the disappearance of Malaysia Airlines Flight 370 also contributed to the traffic-growth slowdown.

It expects air traffic growth on international routes to outperform domestic traffic growth in the second half as the global economy continues to recover.

The company recommended a first-half dividend of 0.0469 yuan a share, compared with a first-half dividend of 0.0466 yuan a year earlier.

Source: Wall Street Journal by Joanne Chiu

Global Cruise Lines Set Sail for China

(AP) — Royal Caribbean's newest ship has attractions not usually seen on cruise liners, including bumper cars, a skydiving simulator and a glass observation capsule on a mechanical arm that lifts its passengers high into the air.

What's also a surprise is the vessel's intended home port: Shanghai.

After floating out of a German shipyard last week, the $935 million Quantum of the Seas will spend the winter running between New York and the Caribbean before moving to its new base next summer in mainland China's financial center.

It's a gutsy move for the world's second biggest cruise company. Cruise operators have traditionally sent older vessels to developing countries while saving their most advanced ships for U.S. and European customers. But surging growth in China means it's a market operators can no longer ignore.

Carnival Corp., the No. 1 cruise company, will become the first global cruise operator to have four ships based in China when it deploys its Costa Serena to Shanghai in April.

The race for China underscores the growing strength of the leisure and travel industries in the world's No. 2 economy as authorities try to spur domestic spending rather than trade and investment as an engine of growth.

Executives are confident about China's prospects even as its economy struggles with a prolonged slowdown from double digit rates of expansion, saying that growth is still strong when compared with developed markets.

Miami-based Carnival expects to carry 500,000 Chinese cruise passengers in 2015, up from 350,000 this year.

"We know that's just a drop in the bucket to what lies ahead in terms of the market in China, which we believe is going to someday represent more than half of all the cruise guests," Carnival CEO Arnold 

Donald said in a phone interview.

The Asian Cruise Association estimated last year that the overall Asian market, which totaled 1.3 million passengers in 2012, could nearly triple to 3.8 million in 2020, including 1.6 million from China.

Carnival is even more optimistic, predicting the number will grow to 7 million by 2020 or about a fifth of the global market.

"For the next five to 10 years, greater China including Hong Kong will play a critical role to the global cruise industry's development," said Zinan Liu, Royal Caribbean Cruises Ltd.'s managing director for China.

While the U.S. and European are showing signs of revival, "there's no region like China and Asia that will grow as rapidly," he said.

Liu said Royal Caribbean expects to carry 400,000 Chinese cruise passengers in 2015, double the number from last year, from four main ports — Shanghai, Hong Kong, Xiamen and Tianjin.

The company's 18-deck Quantum of the Seas, which carries 4,180-passengers, arrives in Shanghai in May next year, joining two other Royal Caribbean ships based in China. It's also expanding operations in Hong Kong to better market to customers in neighboring Guangdong, the richest province in mainland China, Liu said.

For Carnival, the addition of the Costa Serena will raise its China capacity by 3,780 passengers. The company has two other Costa brand vessels stationed in Shanghai as well as one with its Princess brand.

While companies are salivating over the growth potential of China's newly wealthy middle class, hurdles remain.

One factor complicating efforts to pitch cruises to mainland Chinese is that "the vast majority of the population have no concept of a cruise," said Donald, Carnival's CEO.

Unlike American or European cruise passengers, who tend to be older and have the time to take two week journeys, Chinese cruise travelers are younger and have less vacation time. That limits the possible itineraries and presents a challenge in cultivating repeat travelers.

Shanghai software engineer Cao Ying took a five-day cruise to Japan and South Korea with her husband on Carnival Corp.'s Sapphire Princess, operated by its Princess Cruises brand, after he took one with other staff at his Internet company to entertain clients.

The 30-year-old loved the dining, the shows, the spa and the helpful staff. But she complained that there wasn't enough time during port calls.

"I think travelling by cruise is a good experience, but the downside is that you couldn't really see a lot. I couldn't go to visit the places I would like to go in a foreign country," said Cao. "So unless it's a free trip, I wouldn't take a second cruise, even to go to another country."

Another big complaint is insufficient cruise ports and related facilities. China's focus in the past few decades on export manufacturing means ports are geared to shipping containers rather than leisure travelers.

Uncoordinated infrastructure development was highlighted when Shanghai opened a new $260 million cruise terminal on the city's historic riverside Bund in 2008, only to discover that many big ships couldn't access it because of a low bridge downstream. Another $140 million terminal with two berths opened at the river's mouth in 2011 to accommodate those vessels.

Hong Kong christened a new $1.2 billion cruise terminal last year, but the Norman Foster-designed facility has so far been infrequently used. Visits are expected to pick up in coming years.

Visitors have criticized the terminal, built at the end of the old Kai Tak airport's runway jutting into the scenic harbor, for being hard to access by bus or taxi. A smaller terminal near the city center is more popular and a home base for ships operated by Genting Group's Star Cruises.

China's "lack of infrastructure is the biggest impediment to growth," the annual World Travel Market industry conference, said in a report last year that recommended government intervention to realize improvements.

Source: Associated Press by Kelvin Chan

Qingcheng Mountain in Chengdu, China

Qingcheng Mountain is a famous Taoist mountain, and is one of the places where Taoism was originated. 

Qingcheng Mountain has a beautiful peak near the city, and another peak sits behind it. It can be experienced differently depending which path you choose. Qingcheng Mountain has been a major travel highlight in Chengdu area because of its numerous ancient Taoist and Buddhist temples and historic sites. It was once a religious pilgrimage destination.

The mountain was enrolled into the UNESCO World Heritage in 2000.

Source: China Daily

Cathay Pacific Profit Jumps on Improved Demand

(WSJ) Cathay Pacific Airways Ltd.'s first-half net profit soared as more people took to the skies, but the Hong Kong-based carrier sounded a note of caution as competition in the sector heats up.

In a statement Wednesday, the blue-chip airline said its net profit for the six months ended June 30 was 347 million Hong Kong dollars (US$44.8 million) compared with a first-half net profit of HK$24 million a year earlier, when it faced weak demand for premium seats and a soft air-cargo market. The carrier didn't give a quarterly breakdown for its earnings.

Despite stronger first-half results, Cathay Pacific Chairman John Slosar said the operating environment for the carrier and the aviation industry as a whole remains challenging. "We face significant competition in our passenger business. This makes it difficult to maintain yields," Mr. Slosar said, noting that air-cargo business also remains problematic because of excess capacity.

Cathay Pacific's passenger yields, a key measure of airlines' profitability, dropped 3.5% to 66.6 Hong Kong cents in the first half, despite passenger load factor--or the proportion of seats filled on flights—rising 2.3 percentage points, to 83.6%. A lower yield reflects the airline's weaker pricing power as it seeks to increase market share amid tough competition.

The airline's comments underscored the competitive threat that premium Asian carriers such as Cathay Pacific and Singapore Airlines Ltd. face from highly aggressive budget airlines flying shorter routes.

In response, Cathay Pacific has been increasing frequency and adding destinations in the U.S., the Middle East and Europe. But competition from Gulf-based carriers such as Emirates Airline and Qatar Airways on long-haul routes has put pressure on ticket prices, despite signs of a gradual recovery of international air travel demand.

Barclays Research analyst Patrick Xu said he expects Cathay Pacific's yields to pick up on continued air traffic growth in the second half. Easing political unrest in Thailand would also help sustain yields, he added.

"Demand and yield was also affected by the unrest in Thailand. Our channel checks suggest local airlines believe a lift of martial law may be possible in October 2014 or January 2015, which should help the regional short-haul demand and yield," Mr. Xu said.

Citi Group analyst Michael Beer wrote in a note that Cathay Pacific's yields in both passenger and cargo operations could firm further in the second half on the back of "potential demand for business travel associated with a better macro outlook in the U.S. and Europe as well as better investor sentiment in China." The carrier's capacity discipline over the past 18 months and improving air cargo fundamentals heading into peak season would also buoy yields, he added.

The carrier's results were also weighed down by losses from affiliate Air China Ltd. and Cathay Pacific's cargo joint venture with the Chinese flag carrier. Combined losses from Cathay Pacific's affiliates, including Air China, widened to HK$265 million from HK$155 million a year earlier partly due to substantial foreign-exchange losses as the yuan depreciated against the Hong Kong dollar. 

Cathay Pacific holds a roughly 20% stake in Air China and Air China, in turn, has a 30% stake in the Hong Kong carrier.

High fuel prices also hurt Cathay Pacific's profitability. In the first half, the airline's fuel costs, which accounted for 38% of its total operating costs, rose 5.2% to HK$19.95 billion from HK$18.97 billion.

Cathay Pacific, which also owns China-focused Hong Kong Dragon Airlines Ltd., said its first-half revenue rose 4.6% to HK$50.84 billion from HK$48.58 billion on improved demand for air traffic. The two airlines carried a combined 15.44 million passengers in the first half, a 6.5% gain from a year earlier. It recommended a first-half dividend of 10 Hong Kong cents, up from six cents a year earlier.

Source: Wall Street Journal by Joanne Chiu

Thailand waives visa fees for Chinese tourists

(Xinhua) Thailand will waive visa fees for tourist visa applicants from the Chinese mainland and Taiwan from Saturday to boost tourism, according to the Tourism Authority of Thailand's Beijing Office.

The political situation in Thailand has stabilized and the country wants to attract more Chinese tourists in the coming months, said the office.

The initiative will last for three months.

China was Thailand's largest source of tourists last year. In the first five months of 2014, the number of Chinese visitors to Thailand reached 1.47 million.

Dai Yu, a marketing manager of China's leading online travel agency Ctrip, said the new policy will help restore the confidence of Chinese travelers and boost Thailand tours.

Source: Xinhua

China Military Trump Vacationers as Drills Ground Flights

(Bloomberg) Shen Zhihong arrived at Shanghai’s Pudong International Airport looking forward to a vacation at the beach only to find his flight delayed indefinitely and his holiday plans at the mercy of the People’s Liberation Army.

The 64-year-old retired professor was among thousands to have their travel obstructed last week when more than 900 flights at Shanghai’s two airports were canceled as the Chinese military staged exercises in the East China Sea. That was the most of any city in the world and more than those of the New York and Chicago metropolitan areas combined, according to Flightstats, a website that compiles airline data.

“We understand and support the needs of national defense,” Shen said as he waited to fly to the port city of Dalian with a group of former colleagues from Fudan University, where he used to teach. “But we hope there will be less and less impact on civilian flights.”

Delays at Chinese airports, ranked the world’s worst, highlight the tensions in a nation home to a swelling middle class and a ruling party with a 65-year monopoly on power that’s intent on strengthening its military. At stake is the growth of a commercial aviation market that trails only the 

U.S. in size and needs the PLA to cede airspace to China Southern Airlines Co. (1055) and other carriers to increase routes.

“The Western world’s been following a different model where civilians take priority,”said Geoffrey Cheng, head of transportation research at BOCOM International. “The aviation market has been developing in China at the discretion of the military releasing airspace.”

Worst Ranking

Shanghai’s Pudong airport was ranked next to last for timeliness among the world’s 35 busiest, with only 29 percent of flights departing on schedule, according to a June 2013 report by Flightstats. 

Beijing’s Capital International Airport was the worst, with just 18 percent of flights on time.

Phone calls to the Shanghai Airport Authority and the Civil Aviation Administration of China seeking comment went unanswered. The Ministry of Defense didn’t respond to faxed questions seeking comment.

Anger about delays has triggered extreme reactions. In April 2012, a 15-hour delay prompted about 30 enraged passengers to storm onto the taxiway at the Pudong airport. Two days later, another group of passengers also forced their way onto the tarmac, this time at Guangzhou Baiyun Airport. (600004)

Military Control

One reason for the delays are limits on where jetliners can fly. While head of the department for air transportation regulation at the Civil Aviation Administration of China, Shi Boli said in a May 2013 interview that civilian aircraft could only use about 20 percent of airspace. In eastern China, home to the busiest airports, the military controls 52 percent of air space, according to a 2011 report by the 

China News Service.

By contrast, military-controlled and restricted air zones in the U.S. are relatively rare, said Richard Aboulafia, an aerospace analyst at Teal Group Corp. who is based in Fairfax, Virginia. European airspace is managed under a “flexible use” policy and there’s seldom any major impact on civilian routes, according to air traffic supervisory agency Eurocontrol.

The effects of military control over Chinese airspace have been on display in the past three weeks. On July 22, state broadcaster China Central Television reported that airlines had been ordered to cut a quarter of their flights to a dozen domestic airports to accommodate four weeks of “high frequency exercises” from July 20 to Aug. 15. The report, posted to CCTV’s microblog, was later deleted.

Every Country

Geng Yansheng, a defense ministry spokesman, said at a July 31 briefing that military drills would affect civilian flights to a “certain extent.” This phenomenon “exists in every country,” Geng said, according to a transcript of his remarks posted on the ministry’s website.

China’s military drills are growing in scale amid increased tensions with Japan, Vietnam and the Philippines over competing territorial claims. Last weeks exercises in the East China Sea took place as live-fire drills were held in the Bohai Strait and the Gulf of Tonkin. Zhang Junshe, a researcher at the Navy Military Research Institute, told the Beijing News it was a coincidence that the exercises happened simultaneously, though the scale of the drills was larger.

That’s put the PLA at odds with surging demand for travel from China’s burgeoning middle class. The number of outbound Chinese tourists will double to 200 million annually by 2020, CLSA Asia-Pacific Markets estimated in January.

More Congestion

China Southern, Asia’s largest airline by passengers, and other local carriers are buying planes and adding flights in response. Their total number of aircraft may almost double to 4,200 by 2020 from 2,145 at the end of last year, according to Li Jiaxiang, head of the civil aviation regulator.

China Southern fell 1.5 percent to HK$2.65 as of 2:27 p.m. in Hong Kong trading today, extending the year-to-date-decline to 12 percent. Air China Ltd. (601111) fell 1.5 percent to HK$4.75 and China 

Eastern Airlines Corp. fell 2 percent to HK$2.50.

Without more airspace, more planes will mean more congestion if airlines must squeeze greater numbers of flights into the existing number of routes.

Chinese travelers have an alternative in the 19,000 kilometers of high-speed rail that the government targets building by 2015. A journey from Beijing to Shanghai by that train network is about five hours, compared with about three hours by air.

“China is going in that general direction of reform, but opening up air space is a multi-year process,” said Paul Wan, head of Asia transportation and industrial research at CLSA Ltd. in Hong Kong. 

“Nobody should expect anything to change too much too soon.”

Source: Bloomberg News 

Priceline to Invest $500 Million in Ctrip

Priceline Group Inc. plans to invest $500 million investment in Chinese online travel company Ctrip.com International Ltd., as the online reservation company seeks a larger footprint in the world's biggest outbound-travel market.

Under the new deal, Priceline's Booking.com hotel-booking site will advertise Ctrip's inventory of hotels in China. Ctrip, meanwhile, will be able to offer its users a wider array of deals from Priceline's platforms including Booking.com, Agoda.com for smaller hotels, OpenTable and rentalcars.com.

"This looks like a financial and strategic alliance of two champions," said technology hedge-fund manager Richard Ji of All-Stars Investment.

The deal helps Priceline, the world's largest online reservation company by market capitalization, root itself in a country poised to surpass the U.S. as the world's top business-travel market this year. With a broader portfolio of inventory to offer its users, Ctrip hopes to siphon business from travel agents, the company said. While about 40% of travel bookings in the U.S. and Europe are done over the Internet, in China, that level is just 15%.

"Our biggest competitors are the offline travel agencies," said Oliver Hua, managing director of Asia at Booking.com. "We want to offer better selection and value to lure Chinese outbound travelers online."

Priceline said Wednesday that it has agreed to invest $500 million in Ctrip through a convertible bond. 

As part of the deal, Priceline can buy Ctrip shares on the open market over the next year, and amass as much as 10% of the company's shares outstanding. Upon purchase of the bond, Priceline can name an observer to Ctrip's board of directors.

"We have very strong services in China, which Priceline's overseas clients can use," said Jane Jie Sun, Ctrip's chief operating officer. "Priceline will provide the best terms to our clients."

Priceline has an existing partnership with Ctrip, signed in August 2012, that allows Ctrip's hotel-reservation service to access Booking.com's portfolio of world-wide hotels for outbound Chinese travelers.

Currently, Ctrip's overseas market accounts for 10% of its revenue. The company expects that proportion to double in six years, said Ms. Sun. She said she expects Ctrip's revenue to increase tenfold by 2020, based on annual revenue growth rate of 45% a year, at which point she expects Ctrip to vault ahead of Priceline to become the world's most valuable online travel company. Ctrip's current market capitalization is $8 billion, compared with Priceline's $67 billion.

The Boston Consulting Group estimates that 49% of all passenger traffic globally will be within Asia or between Asia and the rest of the world by 2030. Chinese travelers will make up about 40% of all Asian outbound international travelers by that year, the consultancy says.

Ctrip and Priceline's tie-up came amid a string of others in China's travel sector. Expedia Inc. has a 65% stake in Chinese travel site eLong Inc. Chinese travel-site operator Qunar.com has benefited from the traffic sent by its investor, Chinese search engine Baidu Inc. 

Source: Wall Street Journal by Wei Gu

Priceline Expands China Options With Ctrip Investment

(Bloomberg) Priceline Group Inc. (PCLN), the largest online travel agent in the U.S., will invest $500 million in Ctrip.com International Ltd. to broaden the companies’ options in China.

Priceline and Ctrip, which have had a commercial partnership since 2012, will increase their cross-promotion of each company’s hotel inventory and other travel services, the companies said yesterday in a statement.

Ctrip, China’s biggest travel website, is expanding its hotel-booking business as sales increase. Chinese revenue per available room rose 7 percent in May, the highest growth since 2010, according to Bloomberg Intelligence. Ctrip’s total sales climbed 38 percent to about $276 million in the second quarter, according to a statement July 30.

The partnership with Ctrip will spur both companies’ growth, allowing them to access each other’s portfolios, said Priceline Chief Executive Officer Darren Huston. It will bring to Priceline more bookings from Chinese travelers going abroad as well as increase the selection of accommodations and broaden the company’s geographic reach within the country. Currently, Priceline is under-represented in China when it comes to accommodations, he said.

‘Broadest Selection’

“It’s like putting products on the shelf. If you put more products on the shelf, it enhances the value of the store,” Huston said.

Chinese travelers are critical to any global travel company, he said. The middle class, which has increased amid explosive economic growth, makes more money and wants to see the world. An increasing number of Chinese tourists are shifting online to book their plans, a market that Priceline is eager to tap into.

“Our primary way of growing as a company has and will be organic growth, and the commercial side of this deal is critical to helping us keep up the fast pace of organic growth,” Huston said.

Priceline has used acquisitions to drive growth and surpass Expedia Inc. in revenue, including last year’s purchase of Kayak Software Corp. for about $1.7 billion.

Priceline’s investment in Ctrip, through a convertible bond and an agreement to buy Ctrip shares on the open market over the next year, means the company may own as much as 10 percent of Ctrip.com, which is listed on the Nasdaq Stock Market. With the purchase of the convertible bond, Priceline has the right to name an observer to Ctrip’s board.

Ctrip’s American depositary receipts closed at $60.45 yesterday in New York, giving the company a market value of $7.8 billion. Priceline, based in Norwalk, Connecticut, closed at $1,280.57, for a market value of $67 billion.

Source: Bloomberg News Jennifer Surane and Jing Cao

China Aircraft Leasing Seeks to Expand in Asia After IPO

(Bloomberg) China Aircraft Leasing Group Holdings Ltd. (1848) seeks to expand in Asia after becoming the first plane lessor in the region to go public last month.

The company has signed an agreement with state-owned carrier Air India Ltd. to lease five Airbus Group NV A320s starting next year, Chief Financial Officer TT Yu said in an interview Aug. 1 in Hong Kong without providing a value for the contract. This is the company’s first leasing pact with a non-Chinese carrier, he said.

Leasing companies are boosting their fleet and expanding across Asia as the region is set to overtake the U.S. as the world’s largest plane market, spurred by demand from China, India and Southeast Asia. 

Last month, China said it will encourage its lessors to look for opportunities overseas and today Hong Kong billionaire Li Ka-shing’s Cheung Kong (Holdings) Ltd. said it submitted a preliminary proposal for some planes of Awas Aviation Capital Ltd.

Even with the overseas expansion, a majority of China Aircraft Leasing’s business will continue to come from its home market, Yu said. The company, which counts Air China Ltd. (753), China Eastern Airlines Corp. (670) and China Southern Airlines Co. (1055) among its customers, has said it has a 3.1 percent share of the business in the country.

“We will continue to focus on China,” Yu said.

Aircraft Demand

The company’s shares rose as much as 3.4 percent to HK$5.53 in Hong Kong trading today compared with an initial offer price of HK$5.53.

China Aircraft Leasing last month sold HK$728.9 million ($94 million) of shares in the IPO. The sale was “more to help us reduce borrowing costs as we start to look toward other parts of Asia,” Yu said.

China Aircraft Leasing had 32 planes in service with an average fleet age of 3.3 years as of the end of last year. The company aims to expand the fleet to 40 by the end of this year and to 64 by the end of 2016, according to its IPO prospectus.

Air travel demand in Asia is projected to expand 5.7 percent in the four years through 2017, the second fastest pace in the world, with routes within or connected to China being the single largest driver, according to an International Air Transport Association’s study last year.

Asia will push commercial aircraft sales to $5.2 trillion over the next 20 years as China overtakes the U.S. as the world’s largest aviation market, Boeing Co. predicted last month. China’s emergence as an aviation superpower will help drive the market expansion, said Randy Tinseth, vice president of marketing at Boeing’s commercial airplane unit.

BOC Aviation Pte, owned by Bank of China Ltd., is expected to have a record number of aircraft on its fleet this year, helped by growing demand for single-aisle planes. At the end of June, the Singapore-based lessor had 251 planes. Last month BOC Aviation ordered 43 A320s.

Source: Bloomberg News by Clement Tan