When we watch the news pundits discuss the US economy, the biggest subjects revolve around the sub-prime real estate market, high inflation, and, of course, the growing trade deficit. Surely, the airline industry in the United States is doing poorly, but in China, it seems that everything is booming.
Photo Credit: Air China
Air China is growing quickly
Air China, with a market cap of $17 billion, is showing its strength with large dollar purchases of commercial jets. While the United States is stalled in airline development, Chinese airlines are investing much of their earnings back into infrastructure. Air China differs from US airlines because it is turning a profit, while selling at a PE that is ridiculously low for the type of value that it shows.
Today, Air China sells for just 10 times next year's earnings. This comes after an order for 20 airbus planes that will expand is capacity by 16.5% over 2007. Last week, another order was placed for an additional 45 aircraft from Boeing, adding another 35% capacity. Airlines are obviously a booming industry in China as more and more people have the money and capacity to fly domestically and internationally.
What is the difference?
If China’s airlines can stay profitable, why can’t US airlines? Much of the difference may have to do with the large trade surplus of China and deficit of the United States. China Southern Airlines transported a whopping 200,000 tons of cargo, as well as 7.9 million people. China Eastern Airlines carried 3.95 million people and another 129,000 tons of cargo. It appears to be that the airline industry in China enjoys profits, either with passenger travel or with the large volume of products that are shipped beneath passengers as an extra way to profit.
UPS once experimented with a passenger airline that performed the same services, but was boggled down with orchestrating the travel of people and cargo.
Trade surpluses very important
A trade surplus is one critical element keeping Chinese airlines in business, while the same factor limits the profitability of US airlines. The expansion in Air China is a perfect example of how important a healthy trade balance is for every sector of the economy. Though the trade balance hardly impacts factors such as passenger travel, it does influence the amount of goods that need to be shipped. With China’s manufacturing centers pumping out millions of products by the day, there is never enough air travel to ship them.
How to play the trade differences
The difference between the trade surplus and deficit is an important factor that should be calculated when making investments in other countries. The amount of money moving back and forth is important for the overall health of exotic investments. Doubling on a bubble is great, but finding money in sound economic environments is even more powerful. Here is just one case for the cause.