Loss-making China Eastern airlines could be sounding a warning most of the rest of the world does not want to hear.

Unveiling operating losses of close to $US1 million ($1.15 million) a day in the first half of 2008, the Shanghai-based airline said it faced an "extremely complicated operating environment" in the second half, with "increasing uncertainties in the global economy, while the Chinese economy will probably experience a slowdown under the macroeconomic adjustment policy".

One could excuse China Eastern for being gloomy about the outlook. After all, it narrowly missed out on securing a white-knight investor in Singapore Airlines (SIA) earlier this year, only to be battered by snow storms, earthquakes and Olympics security clampdowns which, by July, had slashed its international passenger traffic by almost a third.

But if China Eastern is correct about the outlook, a slowdown in the Chinese economy is not just a problem for the airline industry.

Generally, the aviation sector is an effective lead indicator of economic conditions. An airline slowdown in China could translate to a much wider economic drift -- despite the optimism many experts maintain about the resilience of the Chinese economy. China's consumption of natural resources has helped bolster economic growth in many markets, particularly in Asia.

China Eastern concluded that air travel demand is consequently "likely to experience a downturn, while pressure from ever-increasing costs is likely to pose a threat to the development of the air transport industry". This is the first official indication by a Chinese airline that the much-hoped-for post-Olympics recovery may not materialise. For China Eastern, the next steps could involve a government bailout, domestic consolidation or both.

Air China slipped to a first half operating margin of minus 1.3 per cent, while China Eastern's margin of minus 5.2 per cent is of greater concern. Two of China's major carriers are the worst performers in the region.

Air China was more optimistic (although it too unveiled a first-half loss), stating that although there were uncertainties in the development of the industry, the Chinese economy was still displaying continued and steady growth and that the post-Olympics economy and direct cross-Strait flights to Taiwan "will bring new opportunities to the (Chinese) aviation industry".

The Beijing-based carrier added: "Concurrently, the changes which may be made to the industrial business landscape will also create new opportunities for us". As Air China is very close to the Civil Aviation Administration of China (CAAC), this intriguing comment may indicate that Beijing is plotting a major restructure of the airline industry.

Air China's parent successfully blocked SIA's bid for China Eastern at the start of the year -- a move that left China Eastern to wither on the vine. (SIA's share price has performed better this year by not having the overhang of China Eastern weighing on the stock. Both Chinese airlines' shares have shed 70 per cent of their value this year).

In all these circumstances, SIA is much less likely now to attempt a recovery of a severely weakened China Eastern, leaving Air China (and its former chairman, Li Jiaxiang, now CAAC director) to pursue a "domestic solution" -- for example, the formation of a Chinese super carrier -- to attempt to solve the sector's woes.

As the aura of a magnificent Olympic Games fades, officials in Beijing will soon have to come to terms with an airline sector that is in serious financial straits, with a legacy of rising inefficiency and heightened costs.

How quickly Beijing tackles its airline woes will depend on the direction of global oil prices, currency markets and the much-hoped-for post-Games recovery of air travel markets.

Chinese airlines reported massive currency gains in the first half that provided some cover to rising fuel prices and weaker demand.

But if this month's depreciation of the yuan becomes entrenched, the last pillar of support for airline earnings in China will fall and airlines on the mainland could be deeply in the red in the second half of the year.

World-class though its Games may have been, bringing China's airlines to a similar level is now the challenge for Beijing. But looming larger in the minds of China's policy makers will be the maintenance of steady economic growth. Much of the rest of the world will be hoping for further Chinese success.