South-Westerns' Economic News Summaries
Chinese Airlines: What's It Take To Make a Yuan here?
Subject Profitability of Chinese airlines
Topic Monopolistic Competition
Key Words China, airlines, passengers, yield management

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Reference ID: A142441960
News Story

As a result of the country's significant economic growth, China's airlines carried a combined 138 million passengers last year, the most ever. Further, passenger traffic has doubled in the last five years, and the number of passengers expected to double yet again in the next five years for both domestic and international travel combined. China has expanded its infrastructure, and expects another 55 international airports to come online in the next 15 years. So why can't the airlines earn a profit?

First, debt. The big three Chinese airlines - Air China, China Southern and China Eastern - have relied upon debt financing (bonds) to fund their expansions, so they now face significant debt service. In fact, this debt service will continue in the near future, as Boeing has estimated that China will require 2600 new airplanes in the next 20 years--a hefty revenue opportunity for Boeing and Airbus, but an opportunity carrying a big price tag for Chinese airlines.

Second, state mandated ticket prices-in other words, regulation. Chinese airlines would like to practice yield management - the U.S. airline term for variable pricing or price discrimination--to increase its revenues, but the companies are currently hamstrung by the Chinese government insistence on regulating air fares at levels significantly below the perceived market price.

Third, lack of trained staff. China can only supply 60% of its demand for trained pilots and other personnel. The Chinese airline industry thus faces two expensive options: training schools run by Boeing and Airbus (which it currently uses) to train about 600 pilots a year, or importing foreign labor for its airlines. The Chinese government is particularly loath to go the latter route because of national pride, as well as because of the fact that foreign pilots are much more expensive than Chinese pilots.


What impact would yield management (price discrimination) have on Chinese airline revenues? Why?

2. What will happen to wages paid for Chinese pilots over the next few years until the shortage is eliminated? Draw a graph of supply and demand in the market for Chinese pilots.
3. As Chinese airlines begin to merge with each other--as several have already done to alleviate some of the cost concerns stated in the article, consumers will face changes in available choices, available flights, and market prices. As a result, what will happen to elasticity of demand for airline travel? Why?
Source "On a wing and a prayer." The Economist23 February 2006.
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