With the notable exception of airlines belonging to the HNA Group, there’s an assumption that Chinese airlines are flying high. Despite a recent capacity reduction over the Lunar New Year due to temporary Chinese Government internal travel restrictions, domestic seat capacity was bouncing along at or near to 2019 levels. But seat capacity is just one metric to judge how an airline is progressing.
A saturated Chinese domestic market with wafer-thin margins
A recent OAG webinar tackled just this point. The webinar explored why it’s important not to assess China’s airline market’s health on capacity alone. Compared to mid-February 2020, airline seat capacity in China is up 169.9% right now. That’s factoring in the 25 million seats removed in the last six weeks after the Chinese Government put the brakes on domestic travel over the Lunar New Year holiday period. Sounds good? Not so. The domestic airline market in China is saturated with extremely tight margins.
“How sustainable is it?” asked OAG’s Chief Analyst, John Grant. “The margins (from Chinese domestic flights) are wafer-thin compared to their normal operating margins. And they can’t sustain this level of domestic capacity.”
Zheng Lei, China aviation expert and President of the Institute for Aviation Research, agreed. “I think that’s something that the major Chinese airlines are really worried about. Because the domestic market is big, but it’s already saturated.”
Traditionally, China’s big airlines – Air China, China Southern, China Eastern made the bulk of their revenue from international flying.
“It’s broadly accepted that in most markets, international operations are probably three times more profitable than domestic services,” said Mr Grant
“We know that the Chinese successfully migrated a lot of international capacity to domestic capacity at short notice.
It’s just a model that will break at some point. The pressure must be building from (Chinese) airlines to start international flying again.”
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The profits for China’s big airlines are in international flying
Between them, China’s big three airlines are anticipating losses of between US$5 billion and $6 billion for the 2020 calendar year. In the 2019 calendar year, the three airlines combined recorded profits of nearly $1.9 billion. China Southern has already said it expects to post a loss of $1.7 billion from 2020.
While there’s clearly plenty of capacity available in China, these three airlines all also reported big declines in total passengers in 2020. China Southern’s total passenger count declined 36.1% compared to 2019. At China Eastern, the drop was 42.8%. Beijing-based Air China saw its 2020 passenger numbers decline 40.3% against 2019 levels.
There remain plenty of airline seats available in China. But fewer people now take to the air. The revenue generated per available seat kilometer is way down. And that’s a far more critical metric than capacity.
“The future for them (Chinese airlines) is the international market,” said Professor Lei. “For them to be profitable, it’s in the international markets.”
Barriers to China’s airlines resuming international flights
China’s airlines still fly international routes. But they’re flying at vastly reduced levels – around 10% of 2019 levels. That’s due to a whole host of well-known barriers. They include the general downturn in demand and constantly changing border and travel restrictions worldwide.
However, China’s own aviation regulatory body is also putting the brakes on China’s airlines ramping up international services. The Civil Aviation Administration of China (CAAC) has what it calls the “fly-once policy.”
“Basically, Chinese airlines can only operate one flight a week to one country,” said Zheng Lei.
Professor Lei suggests the Chinese Government is keen to ease back on that policy down the track. But the government is also acting very conservatively. Their priority is to firewall China against further outbreaks and infections. However, Professor Lei suggested once the Chinese Government is confident they’ve achieved that, international flights in and out of China will gradually resume.
For China’s big airlines who usually make the bulk of their revenues from international flying, they cannot come soon enough.