The potential benefit of direct cross-strait flights announced earlier this week may not offset the global economic downturn’s negative impact on airlines as some expect, Fitch Ratings said yesterday.
Instead, fluctuations in jet fuel prices and the implications of the global credit crisis that are already making a dent in personal and cargo transportation demand and will act as a more significant force on these airlines’ credit strengths and bottom lines, the ratings agency said in a statement.
Declining market demand would continue through the first half of next year, even though jet fuel costs are not likely to return to the peaks seen in July, it said.
On Tuesday, representatives of Taiwan’s Straits Exchange Foundation (SEF) and China’s Association for Relations Across the Taiwan Strait (ARATS) signed an agreement to triple the number of charter passenger flights between the two sides to 108 weekly, from 36.
The two sides also agreed on a more direct route, allowing airlines to avoid Hong Kong air space to save both fuel and time, while giving a green light to up to 60 charter cargo flights per month.
BENEFIT
Kevin Chang (張崇人), associate director at Fitch’s Asia-Pacific Corporate team, said the new transportation pact would benefit China-based airlines, such as Air China Ltd (中國國際航空), China Eastern Airlines Corp (中國東方航空), and China Southern Airlines Co (中國南方航空), as well as Taiwan-based carriers including China Airlines Ltd (CAL, 中華航空) and EVA Airways Corp (長榮航空).
In contrast, carriers based in Hong Kong and Macau, such as Cathay Pacific Airways Ltd (國泰航空), Hong Kong Dragon Airlines Ltd (港龍航空) and Air Macau Co (澳門航空), may witness a decline in revenues from flights connecting to Taiwan, Chang said in the statement.
“However, the benefit of direct flights can only moderate the impact from the global economic downturn as these flights only account for a limited portion of total traffic,” Chang said.
On Wednesday, Sherman Chan (陳穎嘉), an economist at Moody’s Economy.com, said in a research note that the economy of Hong Kong, which has long served as a middleman between Taiwan and China, is likely to be hurt by the improved cross-strait relationship.
“The special administrative region’s trade and tourism will likely be hurt, as cargo and visitors are no longer required to pass through a third destination,” Chan said.
Chan’s warning was echoed by Cathay Pacific’s cautious outlook issued late on Wednesday night that its full-year financial results would be “disappointing” because of slowing demand and losses from hedging its jet fuel costs.
FALLOUT
But the fallout from the new air transportation agreement may extend to Taiwanese carriers plying the Taiwan-Hong Kong route because of anticipated firece competition brought on by the shortened travel time, reduced fares and lower fuel requirements, Fitch’s Chang said.
“The existing portion of transportation market between Taiwan and China [via Hong Kong or Macau] held by China Airlines and EVA Airways will also be shared by new participants,” Chang wrote.
Currently, Cathay Pacific offers 101 flights on the Hong Kong-Taiwan route each week, while Dragon Air provides 63. Taiwan’s CAL operates 128 weekly flights between Taiwan and Hong Kong and EVA Airways, 53.
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