Fitch: Efficiency needed at China airlines

Fitch Ratings said in a new report that while it expects the outlook on the Chinese airline sector to be benign in the medium term, any meaningful credit enhancement of the three biggest Chinese carriers - Air China Ltd., China Southern Airlines Co. Ltd. (B+ with stable outlook) and China Eastern Airlines Corp. Ltd. (B+ with stable outlook) will be dependent upon improved operational efficiency.

The scope of improvement in their 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 said.

The sector remains one of the most highly regulated industries in China, although further progressive deregulation is under way, Fitch said. The expected liberalization of domestic routes is beneficial to the companies as they will have more operational flexibility to capture growth opportunities and improve load factors, the agency said, although this could be offset by capacity bottlenecks at airports and other infrastructure.

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