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Primed for Take-off

China’s domestic aviation market has almost recovered to pre-pandemic levels, but challenges posed by Covid-19 will persist as the international aviation market, a major revenue source, remains battered

By NewsChina Updated Nov.1

Workers in protective gear disinfect Wuhan Tianhe International Airport, Hubei Province, April 3

In marked contrast to aviation sectors in other countries, China’s domestic aviation industry has posted a remarkable recovery, with the world’s largest market by seat sales.  

According to data released on August 26 by global travel analytics firm ForwardKeys, domestic air travel in China has nearly recovered from the slump experienced during the Covid-19 pandemic, as domestic flight arrivals at Chinese airports reached 86 percent of the level at the end of 2019, with flight bookings reaching 98 percent.  

In comparison, although the US aviation market is improving, The New York Times reported on September 1 that based on federal data, the US aviation market was down 70 percent year-on-year. 

Big vs Small
In the past months, China’s aviation industry, along with its global peers, has seen a dramatic drop in revenue. According to data released by the Civil Aviation Administration of China (CAAC) in early July, China’s aviation industry saw a record 74 billion yuan (US$10.7b) in losses in the first half of 2020.  

But not all airlines were affected the same. China’s three biggest airlines, Air China, China Southern Airlines and China Eastern Airlines, all State-owned enterprises (SOEs), appear to be coping with the changes better than smaller private airlines. The three companies, which accounted for 45 percent of China’s aviation market, recorded a combined loss of 26.2 billion yuan (US$3.8b), or about 35 percent of the total loss.  

This is partly due to a surge in demand for international air cargo services. For China Southern, revenue from international cargo flights increased by 74 percent in the first half of 2020. China’s smaller private airlines, which primarily focus on domestic flights, were hit harder during the Covid-19 pandemic.  

With government backing, State-owned airlines have better access to financial support. It is estimated that the three biggest airlines have issued corporate bonds that amount to about 100 billion yuan (US$14.5b) since the Covid-19 outbreak started. Given their lack of access to resources and high operating pressure, smaller private air carriers have found it harder to overcome the financial distress.  

Since March, Chinese authorities have launched policies offering subsidies and reductions in fees and taxes, amounting to about 10 billion yuan (US$1.45b). In May, the aviation sector was allowed to take low-interest loans of 110 billion yuan (US$160b) from China’s State-owned bank system. But while support from the government can prevent bankruptcies in the aviation sector, it is far from adequate to address the sector’s financial problems. In the past months, there has been a wave of mergers and acquisitions involving China’s private air carriers.  

Acquisitions and Selloffs
On August 28, a court in Harbin, capital of Northeast China’s Heilongjiang Province, announced the auction of 98 percent of the shares in Longjiang Airlines, a small private airline based in the province.  

Earlier in the month on August 4, Wuxi Communications  

Industry Group, an SOE under the administration of Wuxi, Jiangsu Province, announced that it had signed a framework agreement with Yunnan Jingcheng Group on Tuesday to buy shares in Ruili Airlines, a regional airline based in Kunming, capital of Southwest China’s Yunnan Province. Yunnan Jingcheng owns 70 percent of Ruili Airlines, which has 20 aircraft, flying 74 routes covering 43 domestic and foreign cities as of June.  

Wuxi has long been trying to develop into an aviation hub to boost its economy. It was reported that the city was in talks with the troubled Hong Kong Airlines, Hong Kong’s third-largest carrier.  

On July 2, Hongtu Airlines, a private regional carrier based in Yunnan Province, moved its headquarters to Changsha, capital of Central China’s Hunan Province, after securing a large investment from the Hunan provincial government. With 12 aircraft, the carrier is the first based in the province.  

Back in January, the Beijing-based Okay Airways, China’s first private airline, received an investment of 2.1 billion yuan (US$304m) from China Huadian Corporation, an SOE administered by the central government and the Hong Kong-listed real estate company Sino-Ocean Group Holding.  

The trend of local governments acquiring private air carriers through SOEs under their control had already started before the Covid-19 pandemic. In December 2019, Qingdao Airlines, a private carrier based in Qingdao, an economic hub in Shandong Province, that had 25 Airbus A320 aircraft, was acquired by Qingdao City Investment Group, an SOE administered by the Qingdao city government. Starting operations in 2016, the carrier had 25 A320s at the end of 2019.  

The deal regarding Hongtu Airlines’ change of ownership also was made in December 2019. “For some local governments, having a local air carrier is one of their major development strategies,” Li Hanming, an aviation industry analyst, told NewsChina.  

As China’s aviation authorities suspended approval for new charter airlines in the past few years to improve safety, acquiring existing locally operated air carriers became the only viable way to have a coveted airline company. Given aviation’s reliance on economic vitality and tourism, the alliance between airlines and local governments is considered a no-brainer.  

“If these acquisitions are a success, more local governments may follow suit,” said Li Hanming, “If so, there might not be enough regional air carriers to grab.”  

Chinese media reports that several regional air carriers, including Beijing Capital Airlines, GX Airlines, and Urumqi Air, are in talks with authorities in Beijing and the regional governments of Guangxi Zhuang Autonomous Region and Xinjiang Uygur Autonomous Region over changes in ownership. Li said that the Covid-19 pandemic may have provided local governments a chance to “buy cheap.” 

Financial Uncertainties 
But for SOEs and other investors eyeing the aviation sector, the main issue is the full recovery of the aviation market. Although the Chinese mainland’s aviation market is almost back to pre-pandemic levels, making it the only major domestic aviation market to recover, Chinese carriers face financial uncertainties.  

To a large extent, they have achieved the rebound through aggressive pricing strategies to tempt back a wary public. This may have helped to increase aviation operations’ cash flow, albeit at the cost of profits. Over the summer, at least eight Chinese airlines introduced some kind of “all you can fly” pass. But analysts believe that while these marketing campaigns may well increase occupation rates, they will do little to boost the financial well-being of the operators.  

For example, China Eastern Airlines launched the “Wild Your Weekends” passes on June 18. Valid for weekend flights until the end of the year, the pass costs only 3,322 yuan (US$473). The pass was very popular. In its first weekend on June 27 and 28, during the Dragon Boat Festival public holiday, the scheme saw more than 65,000 tickets redeemed, with flight occupancies reaching over 90 percent. 

According to Li Xiaojin, an expert from the Civil Aviation University of China, the average profit margin on domestic flights among Chinese operators is only 5 percent. Under the aggressive “all-you-can-fly” pass, airlines risk running at a loss if a customer flies more than three times. This explains why air carriers have set up strict customer conditions, which have led to widespread complaints.  

Yet although domestic air travel in China has recovered, international aviation is still severely curtailed. According to the Civil Aviation Authority of China (CAAC), in the first half of 2020, the number of international passengers is 23.5 percent of the 2019 level. “It is unlikely that travel restrictions around the world will be loosened in the second half of the year,” Li Hanming said. 

Considering international flights account for about one-third of total revenue for China’s major airlines, it will still be a long, cold winter for both the global and Chinese aviation sectors.