Domestic carriers witnessed an increase in seat kilometer utilization and ticket prices as the tourism industry entered the traditional peak season and fears over the H1N1 flu faded, with analysts saying the aviation sector was likely to report better performance in the third quarter.

"Boosted by the domestic aviation industry's revival and seasonal demand pickup, listed carriers' profit will substantially improve in the third quarter," said Li Lei, an industry analyst with CITIC China Securities.

The lower cost of jet fuel has helped a lot in cost saving, said Ma Ying, an industry analyst with CITIC Securities. "Major business cost of listed airlines dropped by 11 percent in the first six months over last year. Among the cost reduction, average jet fuel cost slipped to 4,167 yuan per ton, a fall of 41 percent from last year," Ma said.

Research by CITIC Securities showed that jet fuel prices would be capped within a limited range. Crude oil for September delivery was at $71.28 a barrel on the New York Mercantile Exchange yesterday. A day earlier, it rose 3.1 percent to $71.58, the highest since June 12.

Petroleum prices have climbed 60 percent this year. But it has shrunk by 50 percent compared to last year's record high of $145.18 per barrel.

Major airlines' interim profit indicated that the domestic aviation market was looking up. The industry made a profit of 4.86 billion yuan in the first half, a record high over the last three years. It made an aggregated profit of 4.62 billion yuan in first half of 2008, and a net loss of 350 million yuan during the same period in 2007.

Both passenger flow and ticket prices rebounded in the first half. Passenger flow increased by 15 percent in the first six months compared to a year earlier. During the bustling travel season in July, August and September, passenger flow will increase further, said Yao Jun, an analyst with China Merchants Securities.

Growing demand has made many agencies cancel deep-discount tickets. According to Michael Peng, a sales manager with Shanghai Business International Travel Service Co Ltd, it was becoming harder to get a discounts of more than 20 percent on any flight.

"The swelling demand from individual travelers has pushed up average ticket prices. At the moment, most tickets are sold at full price," said Peng.

Although the official figure of passenger flow for July hasn't been put out yet, Li expected a growth of 27 percent over 2008. "The same period last year was when the Beijing Olympic Games took place. As China imposed many restrictions on air travel at that time, there appeared to be a demand slump," said Li.

The current price of airline shares cannot completely represent domestic carriers' earnings over the first half of this year, analysts said.

China's benchmark stock index surged to a new high of 3471.44 points yesterday, more than double from last October's 1,664, marking a growth of 35.61 percent in the past three months. During the same period, airline shares had a milder price rise.

China Southern Airlines surged 26.77 percent to 7.15 yuan since May, and Air China leaped to 10.01 yuan, an increase of 44.86 percent.

"The H1N1 flu epidemic stalled airline shares' performance during that period," said Yao. "Transportation shares would not usually surge less than the benchmark index," he said, adding that airline shares would be able to stage a higher rally than the equity market average in the third quarter.

But Li was conservative on China Eastern and Shanghai Airlines' prospects on the bourse. "Their share prices have already surged a lot due to the restructuring news, and their actual profitability will stop them from further rising," Li said.

Shanghai Airlines forecast a loss during the first half, while in the same period last year the carrier made a net profit of 23.4 million yuan.

Last week, rumors that the top three airlines would receive another round of capital injection from the central government were thick. "The capital injection from the government will spark investors' enthusiasm for buying airline shares," said Yao.

"There is already lots of good news for the aviation industry. Therefore, a further cash injection or so will make the market hotter, but not as significant as they seem," said Li.

(China Daily August 5, 2009)