No Relief In China For Boeing, Airbus

Boeing and Airbus can give up any hope that Chinese demand might help offset their global sales slump. The country's aviation industry regulator has advised mainland airlines to cancel or postpone aircraft deliveries in 2009, as carriers struggle with a decline in air travel demand. Clamoring for government handouts, the airlines will listen, though they may have a hard time extracting concessions from suppliers.

The Civil Aviation Administration of China released guidelines Wednesday advising airlines to cancel or delay delivery of purchased aircraft in 2009. It also asked airlines to retire old aircraft and said it will not consider any new airline applications until 2010, according to a statement. The regulator encouraged further alliances and consolidation.

The once booming Chinese airline sector is suffering from overcapacity amid a slump in travel that started in the second half of 2008 as the economy began to cool. The airlines also have suffered from a wave of steep fuel-hedging losses, as oil plunged below $50 a barrel from over $140 a barrel during the summer.

Despite the government's encouragement, it is unclear how many aircraft orders can be canceled or postponed. "I don't think too much flexibility will be given to the airlines because Boeing and Airbus are also facing declining orders" in the U.S. and Europe, said Kelvin Lau, Hong Kong-based airline analyst for Daiwa Securities. "If they allow one airline to defer delivery, many more will want to do the same."

But Boeing (nyse: BA - news - people ) might allow more leeway than its archrival Airbus, a unit of EADS (other-otc: EADSY - news - people ), as the U.S. giant is facing difficulty meeting delivery schedules due to a labor strike that ended in November, he added.

Guotai Junan Securities analyst Martin Wang said the regulator's announcement may not have much impact without incentives, and noted that the commercial decisions remain in the airlines' hands. Delivery cancellations can also be expensive, as airlines typically put up in advance up to 30% of the purchase price, Lau said. Wang estimated penalties for contract changes may run 5% to 10% of the contract price.

Chinese airlines are on course to lose big this year. Beijing injected 3 billion yuan ($437.0 million) in November into China Southern Airlines (nyse: ZNH - news - people ), which Wang expects to post a loss of nearly 1 billion yuan ($145.7 million) for 2008. Wang and Lau expect China Eastern Airlines (nyse: CEA - news - people ) to get a similar government aid package--Wang estimates it is on track to post a loss of over 3 billion yuan ($437.0 million) for the year. Air China (other-otc: AIRYY - news - people ) is in the best shape of the three big Chinese airlines and may get by without aid.