Bolstered by a media report that two of China's leading airliners will get a cash injection from the central government, airline shares posted a sharp rally, with Air China, China Eastern Airlines, China Southern Airlines, Shanghai Airlines, and Hainan Airlines all hitting their upper trading limits of 10 percent on the Shanghai Composite Index.
Shanghai Securities News reported on Sunday that China Eastern Airlines and China Southern Airlines would each get up to 3 billion yuan ($439 million) from State coffers to help them cope with soaring operating costs and lagging market demand.
"The aid will first go to the parent companies of the two listed airliners, and then the cash will be channeled to them through additional share issues or beyond," a source was quoted by the newspaper as saying.
Lu Zhuping, board secretary of China Eastern Airlines, yesterday was cited by Dow Jones as saying that the company had applied for financial aid from the government, but declined to give details about the size of the aid package.
This year, the domestic aviation industry hit a rough patch as the jet fuel price remained high and consumer confidence weakened.
In the third quarter of this year, China Eastern Airlines posted a loss of 2.334 billion yuan, while China Southern Airlines lost 810 million yuan. By the end of the third quarter, China Eastern Airlines' total debt amounted to 74.33 billion yuan, in a stark contrast to its assets of 1.14 billion yuan.
The government aid could temporarily bolster investor confidence and ease the two airlines' financial woes, analysts said.
But airlines still have to cope with a long industry-wide downturn with many businesses cutting travel budgets amid the global financial crisis, they said.
Xia Fulu, an analyst with Industrial Securities, said the rate of seat occupancy has declined 1 to 2 percentage points from a year ago in China's airline industry, adding that "a single percentage point can be translated into a loss of several billion yuan".
The analyst also blamed the industry downturn on the slowing appreciation of the renminbi in recent months.
"Airlines universally have a high debt rate. The appreciation of renminbi will ease their capital flow because they buy airplanes in US dollars," said Xia.
Without the renminbi's appreciation, China Eastern Airlines and China Southern Airlines might have already posted losses last year, the analyst added, chinadaily.com reported.