The FINANCIAL — Fitch Ratings said any meaningful credit enhancement of the three biggest Chinese carriers Air China Ltd, China Southern Airlines Company Ltd (NYSE:ZNH) and China Eastern Airlines Corporation Ltd (NYSE:CEA) , otherwise known as the 'Big Three', will be dependent upon improved operational efficiency.
Fitch expects the outlook on the Chinese airline sector to be benign until 2010, supported by strong GDP growth and staggered capacity expansion, the latter is still controlled by the Chinese government and will continue to be so for the foreseeable future.
The scope of improvement in the Big Three's credit profiles is limited by the price driven competitive environment, the lack of product differentiation, high fuel prices, poor cost control and substantial capital expenditure requirements to cope with the increased demand, Fitch noted.
Although revenues have been growing strongly, largely in line with traffic growth, this has not trickled down to the bottom line, added Fitch.
The rating agency said that the sector remains one of the most highly regulated industries in China, although further progressive deregulation is under way and this will be beneficial to the Big Three, as they will have more operational flexibility to capture growth opportunities and improve load factors, although this could be offset by capacity bottlenecks at airports and other infrastructure.
Although further liberalisation is expected, full deregulation is unlikely in the next five years, and a number of key elements of the industry are expected to be at least moderately regulated by the government, including ticket pricing, fuel price and aircraft additions, added Fitch.
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