REFILE-UPDATE 1-Military drills disrupt China airlines flights

Tue Jul 29, 2014 1:09pm EDT

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BEIJING, July 29 (Reuters) - Military drills are a new headache for China Eastern Airlines Corp and other Chinese carriers, causing hundreds of flight delays and cancellations as they grapple with a sharp decline in earnings.

In one of the most serious disruptions yet, authorities issued a red alert on Tuesday, resulting in a near shut down of 20 airports in east China between 2-6 p.m. (0500-1000 GMT). Air traffic capacity could fall by as much as three quarters at Shanghai's two main airports for the day, authorities warned.

The military exercises, which political analysts say are larger in scope and duration than in years past, come as tensions with Japan and other Asian nations increase, although the government has called them annual and routine.

The delays could affect flights until mid-August, Beijing's Public Security Bureau said last week.

The International Air Transport Association (IATA) expects the delays to have a big impact on Chinese and international carriers. Air traffic authorities and airlines need to work together to minimise disruptions and delays, IATA spokeswoman Miriam Ashong said in emailed comments.

"The inadequate airspace capacity for civil air traffic has contributed to the air traffic delays over China, but is not the only reason," she said.

"The rapid growth of the Chinese aviation industry, the capacity constraints at some of the airports, as well as the regulator's rigid regulations for operations are also contributing to the air traffic congestion."

Chinese authorities recognised the problem and were trying to improve airspace efficiency, she said.

"This is not a problem that can be solved overnight," she said. "Urgent steps will be needed to improve the air route network planning and upgrade the air traffic management system."

MORE DISRUPTION AHEAD

The drills have the potential to cost airlines millions of dollars, some analysts and industry officials said. But others said the impact may not be that bad as planes flying would carry more passengers and airlines would not have to offer large discounts on flights that would normally be less popular.

"China Eastern is affected the most because it based in Shanghai and has more flights to and from nearby cities," said Gao Liangyu, an analyst at Huatai Securities.

A spokesman for China Eastern said the impact was unclear. The carrier has warned passengers about more flight disruptions ahead, especially to and from cities such as Nanjing, Wuhan, Zhengzhou and Qingdao.

Shares in the airlines have shown little reaction to the drills. China Eastern's Shanghai-traded shares have gained 2 percent so far this week, roughly in line with the benchmark index. Air China has gained 3.5 percent and China Southern is up 2.9 percent.

Hit by a sharply weaker yuan that has pushed up costs, China Eastern warned it would only make about 50 million yuan ($8 million) in net profit in the first half, down 93 percent from the same period a year earlier.

Other airlines hit by the drills include China Southern Airlines Co Ltd and Air China Ltd which both operate many flights out of Shanghai.

Air China has also warned of a large fall in first-half net profit while China Southern has said it will make a loss.

($1 = 6.1808 Chinese Yuan) (Reporting by Fang Yan and Matthew Miller and Tom Miles in Geneva; editing by Edwina Gibbs and David Clarke)

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