Frugality expected to dent earnings of country's major carriers in short term

China plans to prohibit full-price air tickets during government travel as part of the ongoing frugality campaign, a move experts believe could put more pressure on the country's major airlines.

The Ministry of Finance and the Civil Aviation Administration of China said in a joint notice on Tuesday that air flights of government personnel traveling on official business should be booked under the principle of frugality and should support domestic airlines.

The new regulation, to be enacted on June 1, states that government personnel traveling on official business must choose low-price tickets whenever possible. Full-price tickets are "in principle" banned, which means that if there are no special circumstances, full-price tickets will not be reimbursed.

Additionally, government personnel who travel overseas must choose flights from domestic airlines, the notice said. If there are no direct flights available, they must take a domestic flight to a nearby location and then transfer to a foreign airline.

Air tickets for government travel should be booked primarily at designated airlines that have been decided upon through the process of government procurement, the notice said.

Airlines should give discounts on the tickets as stated in the contract during the procurement process, it said. According to the notice, airlines should give an additional 5 percent discount for discount tickets and a discount of either 12 percent or 15 percent for full-price tickets.

Despite the authorities' stated intention to boost the development of domestic airlines, the new regulation could be another blow to major domestic airlines in the short term, an analyst said.

"It could reduce the net profits of domestic airlines because the profit margins brought about by full-price tickets in government travel is very important to their revenue structure," said Li Lei, a civil aviation analyst with China Minzu Securities Co.

Li said the authorities' measure could also help drag down the price of air tickets and put renewed pressure on airlines, adding that the government frugality campaign has significantly reduced air travel by government personnel.

The three major airlines in China — Air China, China Eastern Airlines and China Southern Airlines — all reported major declines in net profits in their annual reports for 2013.

Air China, the flag carrier of China, saw a 32.41 percent year-on-year reduction in its net profit in 2013. It is the third consecutive year that the carrier has reported reduced profits. The decline was attributed to China's slowed economic growth, the global economic recession and a weak cargo market.

China Eastern Airlines reported a 25.12 percent reduction in net profits in 2013, while China Southern Airlines saw a reduction of 27.89 percent, according to their annual reports.

The volume of air travel made by government personnel on official business could exceed 3 billion yuan ($481 million) each year, Beijing News reported, citing figures from the Civil Aviation Administration of China.

Zhang Wu'an, spokesman for the budget airline Spring Airlines, said the new regulation is good news for them.

"Our ticket price is a cutting-edge advantage for us to average passengers. We can certainly help the government to save more travel costs," he said.

Li Xiaojin, a professor at Civil Aviation University of China in Tianjin, said business travel by air, including government travel, is still estimated to take up more than half of all air travel. "That is why the effect cannot be overlooked," he said.

Li said the major airlines have already faced a major slump in profits in the first quarter of this year due to the appreciation of the yuan.

"That is because the installments of aircraft are paid in dollars or euros and the airlines collect most ticket fares in yuan," he said.

However, Li, the analyst, said that in the long term the market will have the final say on the price of air tickets and the airlines people choose.

"Despite the items on transfer in the new regulation, it is impossible for all the domestic airlines to cover all the major cities in the world," he said.

"For some high level government officials, it is hard to imagine they would stand the trouble of making two or three transfers during a business trip," he said.

Zhao Lei contributed to the story.