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Airline industry facing challenges on two key fronts, experts say

By Zhong Nan | China Daily | Updated: 2018-08-13 10:23

The surge in passenger traffic and asset securitzation of the Beijing-Shanghai High-Speed Railway, one of the country's most profitable rail routes, will put more pressure on the airline industry, according to experts.

Their comments came after China Railway Corp began promoting the asset-backed securitization and equity financing of the railway sector last year.

In addition, Caixin Media, a Beijing group that provides financial and business news, reported last month that CRC and related partners are preparing for the Beijing-Shanghai High-Speed Railroad to go public.

Securitization is the financial practice of pooling various types of contractual debt, such as mortgages, and selling their related cash flows to third party investors as securities.

The 1,318-kilometer railroad has reported profit growth for four consecutive years since 2014. Supported by 36 pairs of bullet trains running in both directions each day, it transported 160 million passengers last year, double the originally targeted passenger flow volume in 2011.

The railroad earned 29.6 billion yuan ($4.3 billion) in sales revenue last year, while airlines carried about 7.5 million passengers between Beijing and Shanghai airports, earning 7.4 billion yuan in such revenue, according to CRC and the Aviation Administration of China.

Because the majority of passengers traveling by air between Beijing and Shanghai are business travelers, they are "insensitive" to fares, and airlines rarely offer tickets at a discount on this route, said Cheng Zhiwei, a researcher at the National Development and Reform Commission's Institute of Transportation Research.

"Therefore, many people choose high-speed trains between China's two biggest cities, as they offer relatively cheaper prices and rarely experience delays on journeys due to thunderstorms, rain or snow," Cheng said.

Ticket prices for first-and second-class seats on the Beijing-Shanghai High-Speed Railway are 933 yuan and 553 yuan, respectively, and a one-way journey takes between 4 hours and 18 minutes and 6 hours and 20 minutes. An economy class air ticket costs 1,360 yuan on Air China and China Eastern Airlines, and the one-way air journey takes 2 hours and 15 minutes.

Yang Xin, a researcher at China Academy of Railway Sciences Corp, said airlines have to pay a service fee to airports, and their operating costs are frequently affected by fluctuations in the international oil price. Rail passenger service providers are backed by national investment and the support of local governments and shareholders.

The Beijing-Shanghai line was initially proposed in 1990, but construction only began in 2008. The work was completed in 2011 at a cost of 221 billion yuan. The trains can run up at speeds of up to 350 kilometers per hour.

Other bullet train services such as those between Hangzhou, the capital of Zhejiang province, and Ningbo in Zhejiang, and between Shenzhen in Guangdong and Guangzhou, the provincial capital, have all reported handsome profit growth in recent years, data from the CRC show.

Therefore, journeys of between 500 kilometers and 1,200 kilometers will pose a strong challenge to airlines compared with long-haul trips.

Due to high-speed rail links, airlines have stopped operating short-haul routes between Wuhan, the capital of Hubei province, Changsha, the capital of Hunan province, and Nanchang, the capital of Jiangxi province, Yang said. They have also stopped operating between Chongqing and Chengdu, the capital of Sichuan province, Zhengzhou, the capital of Henan province, and Xi'an, the capital of Shaanxi province.

Zhou Qinghe, chairman of CRRC Zhuzhou, a subsidiary of railway vehicle and equipment maker China Railway Rolling Stock Corp, said, "Challenged by China's well-developed high-speed rail network, signaling network and onboard WiFi access, as well as more leg room and food delivery services at stations, it is time for airlines to bring new ideas into their business on short-haul services."

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