20 October 2017, China – China’s Big 3 Airlines just reported their 9M17 operating statistics, reflecting more moderate passenger traffic growth of 10% from 11% in 1H17. This is in line with our expectations (as flagged in our previous report on 18 July 2017 below) that China’s Big 3 Airlines will report markedly weaker 3Q17 financial results under PRC accounting standards in late October compared to last year, mainly driven by pressure on international passenger yields, rising fuel prices and their very high profit base last year although partly offset by the stronger Renminbi.
CHINA’S BIG 3 AIRLINES’ SHARE PRICES HAVE CORRECTED 19% SINCE JULY 2017
As China’s Big 3 Airlines’ share prices have corrected 19% since July 2017, weakness in the upcoming 3Q17 results are already largely priced in.
We now turn our focus on analysing the Chinese airlines’ capacity growth plans in 4Q17 and their implications on the airlines’ yields and profitability.
EXPECT MORE BENIGN SUPPLY AND OPERATING OUTLOOK IN 4Q17
Interestingly, the overall planned capacity growth on China’s domestic and international routes is expected to moderate markedly to 8% y/y in 4Q17 from 11% in the first nine months of this year.
China’s Big 3 Airlines will need to focus more on maximizing passenger yields rather than traffic growth as they have to scale back their capacity growth to ease air traffic congestion and improve the on-time performance of their flights.
Notably, the planned capacity growth has moderated on China’s domestic routes as well as international routes between China and North America, Middle East and Africa. This should help improve the industry’s demand-supply balance and support passenger yield recovery.
Although the China-Asia routes’ planned capacity growth has picked up in 4Q17, overcapacity risk is low as supply should be met by robust travel demand.
However, there are two route regions that are still at risk. The planned capacity growth on China-South West Pacific and China-Europe routes are too aggressive and will result in greater yield pressure on these routes. This is also a negative read-through for Cathay Pacific (293:HK) as the carrier is likely to face greater competition for connecting traffic on its flights to Europe and Australia.
Chart: Planned capacity growth on China’s domestic and international routes (4Q17 versus 9M17)
MODERATE DOMESTIC CAPACITY GROWTH WILL SUPPORT YIELD IMPROVEMENT – CHINA SOUTHERN AIRLINES (1055:HK) IS THE LARGEST DOMESTIC CARRIER
We noticed that the Chinese airline sector’s planned capacity growth on domestic routes is decelerating in 4Q17, rising only 6% y/y compared to 11% y/y in 9M17. This should help to support passenger yield improvements on domestic routes given the already high passenger load factors on domestic routes in China.
This is mainly driven by the 6% y/y reduction in capacity on domestic routes by China Eastern Airlines (670:HK) in 4Q17. Juneyao Airlines (603885:CH)’s planned capacity growth is also 2% lower y/y. This is negative for Shanghai International Airport (600009:CH). See our research report on the Chinese airports published yesterday for more details:
China Southern Airlines (1055:HK) is the largest domestic carrier in China and its earnings are the most leveraged to a stronger domestic market as it has the largest revenue exposure to domestic routes among the Big 3 Chinese carriers.
COMPETITION ON CHINA-SOUTHWEST PACIFIC ROUTES CONTINUES TO INTENSIFY, HURTING CHINA SOUTHERN AIRLINES (1055:HK) THE MOST
We remain concerned about the aggressive capacity growth of 25% y/y in 4Q17 on China-Southwest Pacific routes which is even higher than the 23% y/y capacity expansion in 9M17. This is likely to assert further pressure on passenger yields on these routes.
China Southern Airlines (1055:HK) has the largest capacity exposure on China-Southwest Pacific routes and could therefore suffer the greatest negative impact among the Chinese carriers in this route region.
GROWTH FOCUS ON CHINA-ASIA ROUTES RESUMES, CHINA EASTERN AIRLINES (670:HK) HAS THE LARGEST SOUTHEAST ASIAN ROUTE EXPOSURE
Planned capacity growth on China-Asia routes is expected to nearly double to 13% y/y in 4Q17 from 7% y/y in 9M17, mainly driven by rising capacity on China-Southeast Asia routes. Korea is the only major market where capacity is still down 20% y/y in 4Q17. China Eastern Airlines (670:HK) has the largest capacity exposure on China-Southeast Asian routes.
CHINA-EUROPE CAPACITY GROWTH IN 4Q17 WILL BE MORE THAN DOUBLE THE 9M17 GROWTH PACE, PUTTING PRESSURE ON DOMINANT CARRIER AIR CHINA (753:HK)
China-Europe routes’ capacity growth is accelerating markedly, more than doubling to 12% y/y in 4Q17 from 5% y/y in 9M17. Air China (753:HK) has the largest capacity exposure on China-Europe routes among the Chinese carriers.
CHINESE AIRLINES ARE GAINING MORE MARKET SHARE ON NORTH AMERICAN ROUTES AS UNITED AIRLINES AND DELTA AIR LINES CUT BACK
United Airlines (UAL:US) and Delta Air Lines (DAL:US) have cut their capacity by 5% and 1% y/y respectively in 4Q17. This has moderated the overall capacity growth on China-North America routes to 11% y/y in 4Q17, lower than the 14% in 9M17. The Chinese airlines, mainly Hainan Airlines and China Southern Airlines, are also gaining market shares on these routes. Air China (753:HK) has the largest capacity exposure on China-North America routes among the Chinese carriers, closely followed by China Eastern Airlines (670:HK).
LESS COMPETITION FROM THE MIDDLE EASTERN AIRLINES
The planned capacity expansion on China-Middle East routes is expected to moderate to 9% y/y in 4Q17, lower than the 13% in 9M17. This is mainly driven by capacity cutbacks by Etihad (down 4% y/y in 4Q17) and Qatar Airways (up only 1% y/y) and China Southern Airlines (down 9%) as it could help reduce competition on long-haul routes and ease yield pressure. China Southern Airlines (1055:HK) has the largest capacity exposure on China-Middle East routes among the Chinese carriers, followed by Air China (753:HK).
REVIEW OF 9M17 OPERATING PERFORMANCE
- INTERNATIONAL ROUTES’ PASSENGER TRAFFIC GREW AHEAD OF DOMESTIC WHILE THE DEMAND DECLINE ON REGIONAL ROUTES CONTINUED IN 9M17
Among China’s Big 3 Airlines, China Southern Airlines (1055:HK) continued to achieve the strongest growth, with passenger traffic up 11% y/y in 9M17, followed by China Eastern Airlines (+9%) and Air China (+6%).
Chart: Chinese airlines passenger traffic and capacity growth (9M17)
Chart: Chinese airlines domestic, international, regional passenger and cargo traffic growth (9M17)
- PASSENGER LOAD FACTORS STAYED ABOVE 80% IN 9M17
Among China’s Big 3 Airlines, China Southern Airlines’ passenger load factor improved the most (+2ppts y/y to 82%), followed by Air China (+0.4ppt y/y to 81%) while China Eastern Airlines’ passenger load factor fell slightly by 0.3ppt y/y to 81%.
Chart: China’s Big 3 Airlines passenger load factors (9M17)
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