After recording big losses in the third quarter, China's aviation sector is bracing itself for a long, hard winter, the China Securities Journal writes.

China's aviation industry has already reported shocking losses in the third quarter and is now facing an even tougher and longer winter ahead. It is widely accepted that the industry cannot avoid an across-the-board loss for the whole of this year, and there is little optimism of an immediate recovery.

Statistics from China's aviation authority show passenger throughput growth has been slowing since the beginning of the year, and particularly since May when negative growth figures started being reported.

Passenger throughput on Air China’s (0753.HK, 601111.SH) international routes declined 17.5% year-on-year in August, China Southern Airlines (1055.HK, 600029.SH) reported a 25.4% decline and China Eastern Airlines (0670.HK, 600115.SH) 28.5%.

Summer is usually a golden season for the Chinese airline companies, but not this year. Air China’s revenues climbed just 6.6% on a year earlier to US$5.81 billion (RMB39.68 billion) in the first nine months of the year while operating costs jumped 23.7% to US$5.34 billion (RMB36.46 billion).

Air fares remained low amid falling demand before rising slightly when the fuel surcharge was boosted in July. Fares began decreasing again in August, but the frequent expos and fairs held nationwide since October are expected to help boost air tickets in the fourth quarter.

Fuel constitutes a major part of the total cost for carriers. The price for refined oil, which is set by the Chinese government, was raised RMB1,500 to RMB7,450 (US$1,091) per ton in late June. The price of domestic aviation fuel was marked up a total of RMB2,220 (US$325) per ton in the first three quarters, resulting in an additional RMB2.66 billion (US$389.63 million) in operating costs for carriers.

Risks associated with hedging against rising aviation fuel prices emerged as another cause for concern. Of Air China's RMB1.94 billion (US$284.17 million) loss in the third quarter, RMB926 million (US$135.64 million) incurred through hedging activities.

Pricing strategies, such as markdown and fuel surcharges, can be controlled, but the exchange rate is outside of the control of carriers. Guotai Junan Securities analyst Wu Li said Air China's RMB1.282 billion (US$187.79 million) profit for the first half of the year was boosted by a RMB1.9 billion (US$278.31 million) gain due to the revaluation of the Chinese currency.

Air China would have been in the red if this was taken out. However, it is unlikely the RMB's intermediate rate against the greenback will experience sharp gains this year after hitting a record high of 6.128 in July.

Minzu Securities analyst Wang Xiaoyan said falling business, especially international business, has crippled the profitability of carriers. "If demand for aviation service was strong, the influences of the other discouraging factors would have been indiscernible," he said.

This article originally appeared in Chinese in the China Securities Journal on November 18, 2008. The China Perspective takes no responsibility for the accuracy of the original article.