Morningstar on outlook for Chinese airlines, China’s domestic travel

on Sep29
by | Comments Off on Morningstar on outlook for Chinese airlines, China’s domestic travel |

SINGAPORE — China’s air passenger volume could jump by 10% year-over-year during a critical holiday season that begins later this week — but that won’t help Chinese airlines turn profitable until international travel resumes, said an analyst. 

Chinese airlines, like their peers globally, have been hit by a slump in travel as countries around the world closed borders and limit movements of people to contain the spread of the coronavirus. Domestic travel in China has rebounded strongly as the country recovers from the pandemic, but Chinese airlines will continue to feel the pain, said Ivan Su, equity analyst at Morningstar.

“Without this international demand, it’s unlikely according to our analysis that Chinese airlines would be able to go back into profit territory,” Su told CNBC’s “Street Signs” on Tuesday.

“The overall theme for Chinese carriers is to curb losses during this period instead of making profits,” he said. “Until we see major a pickup in yield, we don’t really think Chinese airlines will be able to generate much profits off domestic routes for long.”

Su added that he did not expect international passenger volumes into China — which has been down about 95% now from a year ago — to pick up strongly this year.

However, the Chinese have become keen travelers within their own country as international borders remain largely shut.

In August, domestic air passenger volumes in China were 20% lower from a year ago. In the later weeks of September, they were higher as compared to a year ago, said Su.

“Heading into the Golden Week, I wouldn’t be surprised if we see a 10% increase year over year in domestic passenger volume,” said Su, referring to week-long Mid-Autumn Festival public holiday starting on Thursday in China.

Struggle for profits 

Many Chinese airlines will struggle to generate profits this year partly due to unlimited flight passes that they have launched, said Su. Unlimited flight passes are prepaid tickets that are purchased for a flat fee that allow any number of trips within a specified time period.

Su said it means the carriers would be making less money on average for each trip on the passes compared to individually bought tickets.

With Chinese airlines redeploying planes to service the domestic market and competing with one another for local passengers, there is also oversupply and competition taking prices down, said Su. He added that ticket prices have been weak in the last few weeks.

And while demand for cargo has been robust, it is not a gamechanger as cargo is a small contributor to the operations of any airline, said Su.

The analyst’s top pick in the sector is China Southern Airlines as the carrier has always catered more to domestic travelers and is strong in cargo shipments.

The airline is also less exposed to business travel — a segment that would be “permanently damaged” by the coronavirus pandemic as people take fewer business trips, said Su.

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