There's never been a better time to fly in China.
Go back a few years, and the market was carved up between the three traditional state-owned giants -- Air China, China Southern and China Eastern. As a result, ticket prices were cozily high.
Those days are fading. While all airlines have had to cut prices in recent years thanks to the reduction in fuel prices, the fall for China's carriers has been particularly savage. The big three have been facing growing competition from cashed-up Hainan Airlines and two new-ish low-cost carriers, Spring Airlines and Juneyao.
Yield per revenue passenger kilometer -- a measure of the carrier's revenue for flying one customer one kilometer -- slid to 0.445 yuan (6.7 cents) at Hainan Airlines in the six months ended June, the carrier said in first-half results Monday, while China Southern came in at 0.49 yuan. That's barely more than the 0.438 yuan that Juneyao, which considers itself the more upmarket of China's two budget carriers, was charging in the same period.
The tougher pricing environment hasn't been kind to the state-owned giants. Shares in China Southern fell as much as 8.3 percent in Hong Kong Tuesday after the company reported a 10 percent drop in first-half profit, the stock's biggest one-day slump in almost eight months. China Eastern is 9.3 percent down on where it started the year, and Air China has slipped 7.2 percent. Shanghai-traded shares of the three have all fallen more than 12 percent this year.
China Southern is even considering hedging fuel purchases, threatening a risky but effective strategy that's helped reduce its kerosene bill below those of international competitors over the past few years.
For those used to viewing Chinese industry as a simulacrum of capitalism rather than the real thing, this evidence that enhanced competition is improving consumer welfare at the expense of big players is somewhat surprising -- and stands in rather stark contrast to the U.S. industry, which has become much more stable and profitable since bankruptcies and mergers reduced it to something more closely resembling an oligopoly.
Don't get too excited. Low-cost and regional carriers such as Spring, Juneyao and Hainan Airlines live and die on their ability to win traffic rights at major airports -- and the largest carriers still have an advantage on this front, with 65 percent of capacity at Beijing airport at present, according to CAPA Centre for Aviation, a consultancy. Aviation is one of the most heavily regulated industries around, leaving plenty of scope to use the power of the state to game outcomes.
As the country's independent oil refiners are learning, China's government has a habit of squashing private enterprise that gets too threatening to state-owned incumbents. That fact should leave investors wary about betting against the big three.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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