Chinese airline shares surged after the government announced plans to slash infrastructure levies charged to the companies, a welcome relief for carriers battling oil-price volatility and currency fluctuations in one of the world’s biggest aviation markets.
Beijing-based Air China Ltd. rose as much as 12 percent in Hong Kong, while Shanghai-based China Eastern Airlines Corp. jumped 20 percent and Guangzhou-based China Southern Airlines Co. rose 15 percent.
The State Council, China’s cabinet, said that it will cut the civil aviation development fund by half starting July 1, part of a raft of fees that Beijing is reducing to lower costs for businesses. That’s set to bring down annual costs at the airlines by hundreds of millions of dollars.
“The cut will bring a considerable lift on the top three airlines’ earnings,” said Ivan Zhou, an analyst at Bank of China International Holdings Ltd. in Hong Kong. “A reduction by half, if applied for a whole year, can lead to an increase in full-year net income somewhere between 15 to 20 percent for these airlines.”
The cut is among a slew of reductions in fees for several industries totaling more than 300 billion yuan ($45 billion) announced by the State Council on Wednesday. They include a 180 billion-yuan cut in mobile-network data and broadband fees charged to small and medium-sized firms, reductions or waivers for real-estate registration fees, and lower railway-shipping rates.
The civil aviation development fund is charged to passengers and carriers for construction of airports and other aviation infrastructure. A reduction by half would see Air China, China Eastern and China Southern saving a combined 3.74 billion yuan based on their 2018 charges, according to estimates by Tianfeng Securities Co.
Also driving optimism for airline stocks is tight seat supply, which is giving carriers a stronger case to increase fares amid rising air-travel demand. China’s aviation regulator continues to cap the increase in the number of flights at busy airports to ensure flight punctuality.
Supply is further tightened by the Civil Aviation Administration of China’s decision in March to ground Boeing Co.’s 737 Max following a deadly crash of an Ethiopian Airlines jet. The grounding has forced Chinese airlines to switch to older versions of the 737 or Airbus SE’s A320 family of aircraft and would take out 2 percent to 3 percent of the seat capacity in China during peak season, Zhou said.
— With assistance from Matt Turner
©2019 Bloomberg L.P.
Photo Credit: Air China plane seen at Beijing International Airport. Chinese airline shares surged after the government announced plans to slash infrastructure levies charged to the companies. Qilai Shen / Bloomberg