China’s air travel recovery shows power of vast home market
08/27/2020|7:04:39 PM|Bloomberg

China’s biggest airlines could provide some much-needed encouragement for an aviation industry starved of good news when they report earnings later this week.

While the coronavirus will still likely saddle Air China Ltd., China Eastern Airlines Corp. and China Southern Airlines Co. with losses for the latest quarter, financial statements from the so-called Big 3 may point to a nascent recovery in air travel thanks to demand in their vast domestic market.

July traffic figures were promising, with passenger numbers for the three airlines rising about 25% from June as travel within China picked up. The trio flew a total of 22 million passengers domestically last month, more than 500 times as many flown at all by Hong Kong-based Cathay Pacific Airways Ltd., which has no home market to fall back on. Revenue passenger kilometers also jumped, though the numbers remain far below a year ago, pre-pandemic.

After being the first hit by Covid-19, which erupted in Wuhan in January, China is emerging from the crisis; it’s the only major economy on track to expand this year. Businesses have reopened and people are traveling again after the government eased restrictions on movement, including for inter-provincial group tours. The FTSE China A 600 Travel & Leisure Index has climbed more than 50% in three months.

“This should boost load factors further and allow airlines to improve yields, a key profit driver,” Jain said, noting that Chinese carriers generate most profit on domestic routes. “Domestic traffic has been consistently showing signs of a recovery, while international traffic has still to take off meaningfully due to hurdles from travel restrictions and quarantine requirements,” he said.

Cheap jet fuel

Second-quarter figures, which the three are due to release Friday, should show an improvement from January-March thanks to higher passenger traffic and the yuan’s resilience against the dollar, Jain said.

Lower oil prices could also help numb some of the pain. Jet fuel fell to less than USD 20 a barrel in May and is likely to average USD 45 in 2020, according to Paul Yong, a Singapore-based aviation analyst at DBS Group Holdings Ltd.

“With revenue from domestic routes making up about two-thirds of total revenue for China’s Big 3 and with relatively low jet fuel prices, this should help them outperform their Asian peers that have higher international route exposure,” Yong said.

What Bloomberg Intelligence says:

* Air China’s net loss may worsen to RMB 5.5 billion in the second quarter as the virus enveloped the period and a second wave emerged in Beijing. Domestic traffic is recovering well, but Air China is slightly more exposed than the others to international flights, analysts James Teo and Chris Muckensturm wrote this week.

* China Eastern could have the biggest quarterly loss at RMB 6.5 billion due to slower capacity recovery and weaker yields. The airline is more reliant than its peers on business travelers, who have been slower to return, and its revenue could slide 72% from a year earlier.

    * First-half net loss could reach RMB 10.4 billion.

* China Southern’s second-quarter net loss may come in around RMB 6.3 billion as international travel is still limited. Cargo could be a bright spot as volumes and pricing improved due to a shortage of capacity and demand for medical shipments worldwide. China Southern is the only major state-owned carrier that hasn’t sold its air cargo business.

    * Expect first-half operating loss of RMB 11.3 billion.

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