Leeham News and Analysis

China’s hollow airline “recovery”: capacity without revenue

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By Judson Rollins

Introduction 

March 15, 2021, © Leeham News: A flood of media coverage has centered on Chinese airlines’ supposed recovery from COVID-19.

The Chinese “big three,” Air China, China Eastern, and China Southern, made headlines with their rapid restoration of flights and even the announcement of new routes. Industry commentators and industry group IATA trumpeted the “recovery to pre-crisis levels” in China.

New routes garner headlines in normal times, but even more so now. And there is other good news: the US Transportation Security Administration last week processed the highest number of passengers since the pandemic all but shut down traffic a year ago.

But yield quality of such traffic in most markets is problematic. Cheap fares draw leisure travelers, yet business traffic remains a fraction of pre-pandemic levels and there are few signs of near-term recovery. Executives at Lufthansa Group, where business travelers deliver nearly 60% of revenue, said earlier this month they believe such travel will ultimately only return to 80-90% of pre-pandemic levels – and not until mid-decade.

If market analysts want to examine China’s recovery, they have to look at the whole picture. China may be leading the way in capacity restoration, but it’s not the “good” news touted.

The positive trends in China are in mainland domestic flights and seats, not passenger traffic or revenue — and not at all for regional (Hong Kong, Macau) or international routes. Scant attention has been paid to operational data from the country’s airlines – and even its national aviation regulator – showing passenger traffic even on domestic routes is still well below pre-COVID levels.

The “big three’s” third-quarter 2020 financial reports – when the domestic market was supposedly beginning to hit its stride – showed revenue losses far greater than the airlines’ pre-crisis share of revenue from international service. Even those disastrous results included a strong tailwind from increased cargo revenue, as the airlines don’t break out their revenue by business segment outside of annual reports.

LNA dug into the reports of China’s three state-owned airlines, privately held Hainan Airlines, low-cost carrier Spring Airlines, and monthly data releases from the Civil Aviation Administration of China (CAAC). Much of this data is only published in Mandarin, or in English only after long delays, so we enlisted translation help to build a more complete picture.

Summary

• Capacity is (mostly) back, but passenger volumes haven’t followed.
• Desperate sales promotions are widespread among Chinese carriers.
• Third quarter 2020 financial reports show grave revenue losses.
• Fourth quarter traffic isn’t materially better – and early 2021 is worse.
• Continued excess capacity appears to be driven by politics, not demand.

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