Interesting article on whats beginning to play out in Asia with the airlines and the affect the Chinese carriers are having which may go some way to explain the fear that has seen AIZ sold down so low - one thing I did take from this is the quote that the Chinese big-boys aren't hedging....
Cathay has no escape from China’s suffocating embrace
Hong Kong’s political activists aren’t the only ones who fear the long arm of the Chinese state these days. Airlines are getting in on the act too. Shares in Cathay Pacific fell as much as 5.6 percent to their lowest level in seven years Thursday after the company junked its forecast for second-half profit and said it was carrying out a “critical review” of its business. Blame competition from over the border.
Mainland China’s big three state-owned airlines have been adding planes and routes at a rapid clip in recent years. Along with HNA-controlled Hainan Airlines, they’ve been chasing a domestic market that Airbus forecasts will grow almost fourfold between 2015 and 2035 and an international one that has already turned China into the world’s biggest exporter of tourists.
If that sort of market growth sounds like good news for Cathay, think again. Boom times can be as fatal to airlines as busts, because when the competition raises capacity too quickly it drives down everyone’s prices.
As Gadfly warned in August, airlines in China and Hong Kong are suffering from a brutal bout of ticket price deflation. Passenger yield—which measures how much a carrier earns for flying a single passenger one kilometer—has slumped across the board. In their most recent reporting periods, the 7 cents and 6.8 cents revenue per passenger kilometer that Cathay and Hainan Airlines were getting was barely more than the 6.7 cents received by Juneyao, an upmarket budget airline that by rights should be making considerably less.
In theory, that deflation should be offset somewhat by the rapidly falling price of jet fuel, but Cathay’s been hit on that front as well. Its state-owned rivals have enjoyed the full benefit of plummeting oil prices because they don’t hedge, while Cathay’s hedging policy has been an expensive failure.
The options for airlines caught in this vise aren’t attractive. Keeping ticket prices low offers no respite from the climate of marginal or negative profits. Putting them back up or cutting capacity just encourages passengers to fly with the competition instead, adding to Hong Kong’s existential sense of marginalization relative to an ebullient mainland.
Cathay still has some cards up its sleeve. Shuffling its aircraft orders would stop the bleed from capital spending while a restructure of the fuel hedge book, or possible higher oil prices, could turn some of those losses back into profits.
The carrier could raise cash by selling off stakes in its catering, ground-handling or frequent-flier programs, though its substantial cargo business isn’t likely to attract investors in a weak market for air freight.
It might also have some supporters in the form of controlling shareholder Swire and Hong Kong’s government, which showed its willingness to go into bat for the local hero in rejecting Qantas’s attempt to set up a low-cost carrier in the territory last year.
Either way, Cathay can’t remain aloof from the market share war playing out in China. Transit passengers make up about half its traffic, according to HSBC analyst Jack Xu, so Cathay is embroiled in this battle whether it wants it or not. Fasten your seat belts.
All these guys up there including Singapore Airlines are completely smothered by the Chinese - Qantas still has Australia domestic & Air New Zealand still has its domestic to fall back on but these other guys are one city operations ie there is basically no domestic market - Hong Kong or Singapore..
AIZ Price at posting:
$1.71 Sentiment: Buy Disclosure: Held
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(20min delay)