Although the increase in the frequency of cross-strait flights may benefit the airline industry’s profits, potential lower airfares on cross-strait flights would be another challenge on top of high oil prices for China Airlines Co (CAL, 中華航空) and EVA Airways Corp (長榮航空), an analyst said yesterday.
Following the government’s relaxation of rules governing free independent Chinese travelers (FIT) to Taiwan, the two sides are planning to increase cross-strait flights to 500 flights per week during the second half of this year, up from the current 370 flights, Premier Wu Den-yih (吳敦義) said on Wednesday.
However, the benefits to the industry from the increased number of cross-strait flights may be partially offset by the government’s expectation that airlines will reduce fares on select cross-strait flights, Goldman Sachs Group Inc’s latest research report said.
“This affirms our view that airlines would have to rethink their pricing strategy on cross-strait routes, where yields are still 50 percent higher than average company yields,” said Hino Lam (林宇軒), a Hong Kong-based analyst at Goldman Sachs, in the report.
The government expects a roundtrip ticket between Taiwan Taoyuan International Airport and Shanghai to fall 10 to 15 percent to below NT$10,000 after the frequency of weekly cross-strait flights increases to 500, from the current NT$11,000 to NT$12,000, Wu said.
The brokerage increased its earnings forecast for EVA by 7 percent, to NT$1.83 earnings per share (EPS) for this year, while it revised up its forecast for CAL by 4.9 percent to NT$0.71 EPS, on the mixed view of the assumptions surrounding increased cross-strait flights and the expectations of further downsides to cross-strait fares.
Following the higher earnings estimates, Goldman Sachs raised the 12-month target price for EVA from NT$21.8 to NT$23.4 and increased CAL’s target price to NT$12.9 from NT$12.2.
However, high oil prices and last year’s high comparison basis remain as the major challenges for the local airline industry compelling the brokerage to maintain its “sell” rating for CAL and “neutral” for EVA, Lam said.
CAL’s share price fell by 0.26 percent to close at NT$18.95 yesterday, while EVA’s stock price lost 0.85 percent to close at NT$29, Taiwan Stock Exchange data showed.
Meanwhile, Council for Economic Planning and Development Minister Christina Liu (劉憶如) yesterday said that she expected the relaxation of regulations on FITs to benefit the local medical and tourism sectors.
“The opening to independent Chinese tourists will improve the 20-year one-way direction from Taiwan to China, including tourists, industries and manpower,” Liu said in a speech at the Institute of Engineering Education Taiwan’s annual meeting.