For two decades, Liu Yueping flew first class on China Southern Airlines Co. (1055) between Changsha and Shenzhen. This year, she took a bullet train and spent a fifth of the 2,000 yuan ($327) she would have paid to fly.
Money wasn’t the issue. The 3 1/2-hour ride on the high-speed rail between Changsha in central China and Shenzhen in the south is never late and allows phone calls unlike on a plane, she said. “Now that we have the bullet train, who will take flights?” said Liu, 50, who owns a property investment company and travels eight to 10 times a year between the cities.
Frequent fliers like Liu migrating to high-speed rail are a drag on earnings at Chinese carriers already faced with lower fares and overcapacity. Travelers in China, where one quarter of flights depart late, are also flocking to bullet trains after the opening of a new line between Beijing in the north and Guangzhou in the south that connects 28 cities along the way.
“What is really killing the airlines is flight delays,” said Andrew Orchard, an analyst at CIMB Group Holdings Bhd. (CIMB) in Hong Kong. High-speed rail has become a major competitor for airlines given the greater frequency of trains, he said.
Under a plan unveiled in 2008, China aims to have a high-speed train system comprising four north-to-south and four east-to-west lines covering 90 percent of the population by 2020. The east-west networks are under construction, while Beijing-Guangzhou is one of three north-south lines in operation.
The 2,298-kilometer (1,428-mile) Beijing-Guangzhou line, the world’s longest, opened Dec. 26, cutting the rail travel time between the two cities to eight hours from almost a day.
The route covers provincial capitals such as Changsha and Wuhan, and links to earlier completed high-speed lines, Beijing-Shanghai and Guangzhou-Shenzhen. It’s scheduled to extend further down south to Hong Kong by 2015.
China Railway Corp., the state-owned rail operator, today invited tenders for 91 bullet trains that can run at 250 kilometers an hour. The company boosted its 2013 fixed-asset budget by 10 billion yuan to 660 billion yuan, and will spend more than 50 billion yuan buying locomotives, bullet trains and rolling stock, the official Xinhua News Agency reported Aug. 7.
At the end of last year, about 10 percent of China’s 98,000-kilometer rail network was for high-speed trains, according to state-run China.com.cn.
Initial concerns about the safety of high-speed trains, which run at speed of 300 kilometers an hour on main lines, haven’t damped demand.
In July 2011, 40 people were killed when a bullet train that had broken down was rear-ended by another locomotive. The government punished 54 officials, tightened safety checks, delayed new projects and slowed the speed of the country’s fastest trains after the crash.
Still, railways increased passenger numbers by 11 percent in the first half of 2013, compared with 4.8 percent for the whole of 2012, according to China Railway (1186), which didn’t provide a breakdown for bullet train users.
The high-speed train line between Beijing and Shanghai -- the busiest airline route -- carried 40 percent more people in its second year of operation through June, according Xinhua.
Chinese airlines increased passengers by 9.2 percent in each of the past two years, data from the aviation regulator show. That’s the slowest growth since 2006, the year the regulator began making figures available, except for 2008 during the global financial crisis.
To help fend off competition, China Eastern Airlines Corp. (670) today began offering a package comprising air and bus tickets. The package, for passengers landing in Shanghai, allows them to continue their journey to nearby cities such as Suzhou and Wuxi by bus, the carrier said in an e-mail.
The average price of an economy-class plane ticket on the Changsha-Shenzhen route has dropped every month in 2013 from a year earlier, data compiled by Dallas-based Sabre Airline Solutions show. The fare fell 5.8 percent to 1,172 yuan in July.
Carriers are saddled with excess capacity after taking delivery of planes ordered earlier. China Southern boosted its monthly domestic capacity by about 10 percent from a year earlier in the first half, according to Bloomberg Industries.
China Southern, the nation’s biggest airline by revenue, fell 0.3 percent to close at HK$3.03 in Hong Kong trading. Air China Ltd. (601111), the second-largest, climbed 1.9 percent to HK$5.35, and third-ranked China Eastern advanced 3.6 percent to HK$2.60. The three companies have fallen more than 16 percent this year, compared with 0.5 percent drop of the benchmark Hang Seng Index.
Companies and government officials are also heeding Chinese President Xi Jinping’s call to pare lavish spending, cutting travel budgets and hurting airline earnings.
The top three Chinese carriers will post either a drop in profit excluding currency gains or a loss when they report first-half results by the end of this month, according to Bank of Communications Co., CIMB and Credit Suisse Group AG.
First-half profit excluding foreign-exchange gains will fall 79 percent to 260 million yuan at Air China, according to Credit Suisse. Without currency gains, China Southern and China Eastern may post a loss of 696 million yuan and 1.3 billion yuan respectively, turning from profits a year earlier.
Air China may report higher net income because of the yuan’s appreciation, according to the three brokerages. A stronger local currency pares the repatriated value of dollar debt taken to buy planes and fuel overseas.
The airlines didn’t immediately respond to e-mailed questions on their results from Bloomberg News.
A pickup in passengers that was expected during the traditionally busy summer travel months has failed to materialize, clouding the second-half outlook for Chinese carriers, Citigroup Inc. said in an Aug. 7 report.
The risk of flight delays will push more domestic long-haul passengers to switch to trains, CIMB’s Orchard said.
Beijing and Shanghai had on-time departure rates of 18 percent and 29 percent respectively in July, the worst among 35 major international airports, according to Portland, Oregon-based FlightStats Inc.
“Not only do you have to go to the airport early, you go to airport early and wait for one hour or two to take off,” Orchard said. “That actually makes the airlines very uncompetitive.”
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