China's government has acted to protect domestic airlines amid an aviation market affected by sharply fluctuating fuel prices and declining demand.

The measures include stopping new plane orders, preventing any new carriers entering the market, and offering financial aid to reduce existing carriers' asset-liability ratio.

China Southern Airlines, the country's largest carrier by fleet size, will receive 3 billion yuan (US$436.5 million) from the central government as part of the country's 54.78-billion-yuan aid package to companies directly controlled by the central government.

Shanghai-based China Eastern Airlines is also applying for a capital injection from the government.

The injection will help reduce China Southern's asset-liability ratio to 80.5 percent while China Eastern's stocks will be able to avoid receiving special treatment if it wins the financial support to decrease its 98-percent asset-liability ratio.

"Government support can boost China Eastern's ability to raise money to solve its cash flow problem," said Zhang Qi, an analyst with Orient Securities Co.

The HNA Group, operator of Hainan Airlines, said the Hainan provincial government was considering injecting capital into Hainan Airlines to counter damage from the financial crisis.

The province has also offered preferential policies for the group, including debt issuing, tax reduction and subsidized loans.

The group said the Tianjin government had already injected 200 million yuan into HNA Grand China Express and another 300 million yuan into its financial leasing company.

"The global aviation market suffered a huge impact from the slumping demand caused by the financial turmoil and the domestic aviation industry's dream of a profitable fourth quarter also broke," said Li Lei, an analyst with China Securities Co.

The country's aviation regulator has also applied to cut domestic jet fuel prices to close a 2,000-yuan gap over global costs. The proposal is awaiting the nod from the National Development and Reform Commission.

Oil and jet fuel prices have fallen to 2005 and 2006 levels with crude oil at US$50-US$60 a barrel and jet fuel prices 25-30 percent higher. This is less than half the US$180-a-barrel peak in July.

But actual prices paid have not fallen for many airlines as a result of hedges taken out earlier in the year, which will delay the benefit of lower spot fuel costs for them. Some airlines have been reporting hedging losses.

Air China Ltd, the nation's largest international carrier, said losses on hedging contracts tripled due to wrong-way bets on fuel prices. The fair-value loss on contracts widened to 3.1 billion yuan from 1 billion yuan in the third quarter.

Of China's three-largest airlines, Beijing-based Air China is the most exposed to fluctuation in international jet-fuel prices as about half of its traffic is on international routes.

China Eastern Airlines said fair-value losses on its jet fuel hedging contracts reached 1.83 billion yuan as of October 31 and Shanghai Airlines suffered hedging losses of 98 million yuan by the end of October.

Cathay Pacific Airways Ltd, Hong Kong's biggest carrier, also said hedging losses as of October 31 were estimated to be HK$2.8 billion (US$361 million).

"Carriers still can recover their losses by buying jet fuels at a low level," Zhang Qi said.

Domestic private carriers were experiencing an even tougher period than state-owned ones as they could not benefit from the government's financial support and lacked traffic on the most popular routes.

China's first private carrier, Okay Airways, has stopped passenger flights for a month over concerns of possible air safety problems caused by conflicts among its shareholders.

Sources said JuneYao Group, controlling shareholder of the carrier which also operates another private carrier called Juneyao Airlines, plans to merge the two airlines' passenger air services to address declining demand in the aviation market.

Sichuan-based private carrier United Eagle Airlines grounded two jets last month due to a fall in operations.

Globally, almost 200 aircraft were parked for a month in September and October, compared with an average of six in 2007, the International Air Transport Association said.

(Shanghai Daily December 10, 2008)