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Airline stocks plunge as direct flights take off

The euphoria expected to greet the commencement of direct cross-strait charter flights failed to lift airline stocks yesterday, with both China Airlines Ltd (中華航空) and EVA Airways Corp (長榮航空) hitting their lower limits on the local stock exchange.

Shares of China Airlines, the nation’s largest air carrier, plunged 6.69 percent to close at NT$12.55 on the Taiwan Stock Exchange, while EVA fell 6.99 percent to NT$12.65.

“Even though cross-strait flights were expected to boost the travel business, the profit margin per ticket is actually lower than that of pre-cross strait flight operations given increased operating costs and shrinking revenue per ticket as competitors engage in a price war,” Alex Huang (黃國偉), an assistant vice assistant at Mega Securities Corp (兆豐證券) said in a telephone interview yesterday.

Huang said that investors also had to bear in mind that weekend charter flights were still considered an uncertain revenue stream because no one could predict business in the coming weekends.

“Cross-strait operations are likely to contribute only NT$0.20 to NT$0.30 in EPS [earnings per share] to carriers — not significant enough to move stock prices,” Huang said.

Moreover, as six Chinese airlines will each dispatch only 18 round-trip flights for the weekend charter flights, “this number is not significant enough to really boost the bottom line of either EVA or CAL,” he said.

High fuel costs pose another serious concern.

“Given an ever escalating fuel environment, how airlines could make a profit remains a mystery,” he said.

The benchmark TAIEX also fared poorly yesterday, finishing lower by 165.69 points, or 2.24 percent, at 7,228.41 — near a 21-month low.

Turnover was NT$98.25 billion (US$3.23 billion) yesterday, shrinking substantially from NT$120.82 billion in the previous session, the stock exchange’s data showed.

Kevin Chung (鐘國忠), a deputy manager at Jih Sun Securities Investment Consulting Co (日盛投顧), said that market sentiment was weak and domestic investment trust companies were the only institutional buyers yesterday, purchasing a net NT$1.48 billion in local shares.

Both domestic proprietary traders and foreign institutional investors net sold NT$390 million and NT$10.75 billion in local shares respectively, he said, citing the stock exchange’s data.

Chung said there was very little buying confidence in airline and tourism stocks.

As to why hotel stocks also took a beating yesterday, Chung said it could be a technical correction following a rise in the previous session.

“Given high fuel prices, it is unlikely that this sentiment will change any time in the near future,” he said.

“Many analysts have forecasted oil prices in the US$170 to US$300 per barrel range, implying that the worst is not over,” he said.

Additionally, with many investors facing margin calls, many are opting to sell out instead of injecting more cash into an already depressed market, Chung said.

The Cabinet proposed earlier this week that local insurers with total assets of NT$8 trillion be allowed to invest in the local stock market, but whether this will be feasible is still under review.

“Right now the key is boosting investor confidence. No amount of capital infusion can effectively save the market as retail investors are still hesitant about putting their money in the market,” Chung said.

Moreover, buyers are likely waiting for the market to bottom out, and “manipulating share price increases will not necessarily help stocks stay up,” he said.

“Rather real buyers are more likely to stay on the sidelines if prices are artificially propped up,” he said.

Investment consultants used to advise clients to invest in “dividend stocks,” or stocks that offer high dividends, to weather the market downturn. But doing that right now would hurt rather than do a world of good, Chung said.

“Dividend stocks get hammered after their ex-dividend dates. They can go down 20 percent after a dividend is issued,” he said.

Many major investors would rather not receive the dividends and save on taxes, he said.

Not only are dividends a tax hassle, but for those who bought these stocks on margin, declines in the share price would mean margin calls.

It seems to be a lose-lose situation for dividend stockholders. On the other hand, Chung thinks it is actually not a bad idea to invest in dividend stocks after ex-dividend dates, and buy low.

Meanwhile, the management committee of National Financial Stabilization Fund, a mechanism that would entitle the government to finance NT$ 500 billion maximum from existing government-run funds and asking loans from banks to purchase shares in stock market, held its regular meeting yesterday.

It concluded that there was no necessity for the management committee to employ the mechanism to interfere in the stock market in the light of recent performance of the market.

The committee said the local market didn’t drop as sharply as global markets and is expected to rebound along with continuing improvement in cross-strait relations.

ADDITIONAL REPORTING BY SHIH HSIU-CHUAN
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