FOCUS: Bird Flu Puts Airlines in Tough Spot

April 5, 2013
As jitters over the H7N9 avian influenza creep into China and neighboring countries, airlines and hotels are taking a hit from the lethal virus that has so far claimed six lives.

By Yonnex Li and Christina Wang

As jitters over the H7N9 avian influenza creep into China and neighboring countries, airlines and hotels are taking a hit from the lethal virus that has so far claimed six lives.

China Southern Airlines Co. Ltd. (01055.HK, 600029.CN) slumped as much as 15.1 percent in Hong Kong as of 2:30 p.m. Friday after authorities confirmed 14 cases of the lesser-known bird flu strain haunting Shanghai and eastern provinces. China Eastern Airlines Corp. Ltd. (00670.HK, 600115.CN) tumbled as much as 11.5 percent while rival Air China Ltd. (00753.HK, 601111.CN) plunged 12.2 percent. Cathay Pacific Airways Ltd. (00293.HK) lost 6.3 percent at one point.

"If the situation deteriorates or drags on, the impact on airlines will be awful," said Paul Yong, a Singapore-based analyst at DBS Vickers Securities, told the Hong Kong Economic Journal's EJ Insight.

Fears of another epidemic sweeping the region may bite into the aviation sector by cutting passenger load factor to as low as 50 percent from the normal 80 percent, as was the case in 2003 when the worldwide spread of severe acute respiratory syndrome, or SARS, sent airline shares into a tailspin. Air carriers again suffered when the H5N1 avian virus re-emerged in Asia in 2003-2004.

"At that low occupancy rate, airlines are bound to suffer huge losses," Yong said, referring to the measure of how much of aircraft seats offered is filled up.

China Southern Airlines' high exposure to inbound travel puts the carrier at a disadvantage. It sources 80 percent of revenue from domestic routes, compared with about 67 percent at China Eastern Airlines and Air China.

Analysts are watching how the nascent spread of the disease -- now at a less threatening stage of animal-to-human transmission -- will evolve before revising down their forecasts on the sector.

"Today's sell-off in aviation equities is mainly by hedge funds taking profits from the latest news," Yong said.

China's No. 1 financial hub of Shanghai remains the worst hit in the bird flu saga. As of Friday noon, China reported six infection cases in Shanghai, four in Jiangsu, three in Zhejiang and one in Anhui province. Of the cases, four died in Shanghai and two in Zhejiang. A person who had close contact with a dead victim in Shanghai has been under treatment in quarantine after showing symptoms of fever, according to the official Xinhua news agency.

Tourism woes

"If the bird flu spreads further across the country, it will definitely hurt people's travel sentiment, especially those for leisure purposes, ultimately putting a drag on the entire tourism sector," said Donald Cheng, an analyst at Haitong International Securities Group Ltd. (00665.HK).

That will cast a shadow on China's vision of a stronger tourism industry, especially hotel operators already battered by a top-down call for a frugal lifestyle. The State Council, the country's cabinet, has approved in mid-February the outlines of a development plan for the travel and recreation sectors through 2020.

As matters stand, China's neighbors are on full alert against the disease with apparently high fatality rate.

More than a hundred Taiwanese have canceled trips to the mainland amid worries over the H7N9 bird flu outbreak, United Daily News reported Friday, citing Yang Sianneng, chairman of the Kaosiung Association of Travel Agents. Most of the travelers were to cities including Shanghai in late April and May, the report said.

Taiwanese health authorities have initiated the island's epidemic prevention and control center, while Vietnam has banned all Chinese poultry imports. Officials in Hong Kong have activated the alert response level in the city's pandemic preparedness plan. In Japan, airports began to flag medical attention to passengers from China.

Shao Qiwei, chairman of the China National Tourism Administration, expected the Chinese tourism industry to generate 2.85 trillion yuan (US$459.37 billion) in revenue this year, up 11 percent from 2012, the Securities Times reported in early January. Last year, 80 million Chinese traveled abroad, while 2.9 billion domestic trips were registered, Shao said.

"Now it's too early to give estimates of the disease's effects on the tourism industry or hotel stocks," Haitong's Cheng said.

Haitong maintains a "hold" rating for leading domestic hotel operator Shanghai Jin Jiang International Hotels (Group) Co. Ltd. (02006.HK). As of end-June last year, the company operated 697 hotels in mainland China, of which 111 hotels were in Shanghai, 123 in Jiangsu province and 44 in Zhejiang province, according to company data.

Jin Jiang shares traded at HK$1.19 (15 US cents) as of 2:30 p.m. The stock has plummeted 19.6 percent so far this year, joining a slump in catering plays amid Beijing's order to cut lavish spending by officials and state-owned enterprises. Chinese markets remained closed Friday for a public holiday.

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