China relaxes air fare restrictions for first time in a decade

Allows airlines to set prices as low as they want on 31 domestic routes

China's aviation regulator has relaxed air fare restrictions for the first time in nearly a decade by allowing airlines to set prices as low as they want on 31 domestic routes.

The air fare reform is the first since 2004 when carriers such as Air China Ltd, China Southern Airlines Co Ltd and China Eastern Airlines Corp Ltd were allowed to set prices on most routes within a specified band.

The change, effective October 9, applies to 31 routes including Beijing-to-Nanjing and Shanghai-to-Tianjin, the Civil Aviation Administration of China said on its website.

This is intended "to give customers more choice," a CAAC spokeswoman told Reuters on Thursday.

Air China's Hong Kong-traded shares closed down 2.8%, compared with the benchmark Hang Seng Index which ended down 0.7%. China Southern and China Eastern were down 0.7% and 1.5% respectively.

Since 2004, airlines have been permitted to charge up to 25% more or 45% less than prices set by the regulator.

Removing the price floor is unlikely to have a major impact on the profitability of domestic carriers, which have been struggling as the economy slows, said Haitong Securities analyst Yu Nan.

Air China's January-September profit fell 3.7% on year to 4.06 billion yuan. That of China Southern fell 7.7% to 2.46 billion yuan, and that of China Eastern fell 0.2% to 3.6 billion yuan.

"Few airlines have strictly abided by the price floor in the first place," said Jefferies Hong Kong analyst Boyong Liu. "It's more a gesture from the aviation regulator, and is in line with the call by China's new leadership for further liberalization."

Airlines frequently lower prices by as much as 80%, and CAAC often threatens fines that it never imposes, industry insiders and observers say.

The reform could help carriers better compete with high-speed railways which offer cheaper tickets, though many airlines have already lowered prices on the 31 routes, Yu and Liu said.

The CAAC spokeswoman said removing the price floor does not mean there will be further liberalization in an industry where airlines need government approval for everything from aircraft orders to airport slots to routes.