Chinese Airline Sector Demand & Supply Growth Forecasts 2018-2022

16 July 2018, China – The Chinese airlines just reported their June 2018 operating statistics. They surprised the market with passenger traffic growth of 13.9% y/y in June, ahead of their year-to-date growth trend. However, growth momentum is likely to lose steam from 2H18. Based on our forecasts, we expect 11.3% traffic growth rate to be the new norm in the next 5 years…

JUNE PASSENGER TRAFFIC GROWTH OF 13.9% SURPRISINGLY OUTPACES ALREADY STRONG GROWTH TREND YTD

The major Chinese airlines just reported their June 2018 operating statistics. Passenger traffic growth was stronger than expected, rising 13.9% on average, ahead of the year-to-date 2018 already strong growth pace of 13.1%.

Spring Airlines leads with a 20.0% y/y growth in passenger traffic in June 2018, followed by Hainan Airlines (+16.3%) and China Eastern Airlines (+13.7%).

During the first half of 2018, Hainan Airlines ranks first with 16.9% passenger traffic growth, followed by Spring Airlines at +15.1% and China Southern Airlines at +12.3%.

Chart: Chinese Airlines Passenger Traffic Growth (June 2018 and Year-to-date 2018)

Chinese Airlines Passenger Traffic Growth (June 2018 and Year-to-date 2018)

HOWEVER, WE EXPECT TRAFFIC GROWTH TO MODERATE FROM 2H2018; 11.3% ANNUAL TRAFFIC GROWTH TO BE NEW NORM IN NEXT 5 YEARS

This above-trend pace of growth is likely to lose steam from 2H18 as China’s economic growth moderates, in our view.

Moreover, the higher jet fuel prices have raised the airlines’ breakeven cost, driving the need to impose fuel surcharges and increase fares to pass on the higher cost to customers. This reduces the affordability of travel at the margin, likely to hamper leisure travel demand.

In addition, based on their existing aircraft orders, the Chinese airlines’ fleet capacity expansion is moderating so they will be under less pressure to discount significantly to fill up their planes compared to previous years.

Based on our forecasts, we expect the Chinese airline sector’s passenger traffic growth to slow to 11.9% in 2H2018 from 13.1% in 1H2018. For the full year, we forecast passenger traffic to grow 12.5% in 2018, moderating from 13.9% in 2017.

The Chinese airline sector passenger traffic will grow at a more sustainable rate of 11.3% per annum in the next 5 years, based on our estimates. China’s rising per capita income and still low air travel penetration will continue to support the country’s domestic and international air travel demand in the years to come. Specifically, we forecast Chinese airline sector passenger traffic to grow 12.5% in 2018, 11.3% in 2019 and 11.5% in 2020.

Chart: Chinese airline sector passenger demand and supply growth (2017 to 2022)

Chinese airline sector passenger demand and supply growth (2017 to 2022)

CHINESE AIRLINE SECTOR’S LONG-TERM SUPPLY GROWTH IS MODEST BASED ON EXISTING AIRCRAFT ORDERS

Notwithstanding their frequent large and high-profile aircraft orders, the Chinese airline sector’s combined fleet capacity growth based on their existing aircraft orders still looks conservative, in our view.

We forecast the sector capacity to grow 11.7% in 2018, moderating to only 8.8% in 2019 and 9.0% in 2020. As such, the risk of industry overcapacity is limited even as traffic growth momentum slows in our view.

In fact, we believe the Chinese airlines have under-ordered aircraft and will need to place more aircraft orders to support their long-term growth.

TRAVEL DEMAND WILL STILL OUTPACE SUPPLY GROWTH FROM 2018 TO 2022 NOTWITHSTANDING THE SLOWDOWN

We expect the Chinese airline sector’s annual passenger traffic growth of 11.3% to outpace the airlines’ planned capacity growth of only 9.8% per annum from 2018 to 2022, keeping passenger load factors high.

This will be conducive for the Chinese airlines to maintain or raise their passenger yields, helped by China’s domestic airfare reform, helping to mitigate the negative impact of higher fuel prices on their long-term profitability. Even for this year 2018, we expect passenger traffic growth of 12.5% to outpace the industry’s capacity increase of 11.7%.

However, the airlines’ scale-back of capacity growth will, however, be negative for the Chinese airports. Moreover, China Eastern Airlines and China Southern Airlines are likely to divert more resources to building their new hubs in the new Beijing airport. The increase in non-aeronautical revenue earned by the Chinese airports may not completely offset this slowdown. 

WHICH ROUTES WILL FARE BETTER OR WORSE?

We expect China’s domestic, ASEAN and European routes to perform better. There will be some recovery in travel demand on South Korean routes as China-South Korea relations begin to thaw. See our previous report on how the geopolitical tensions hurt China-South Korea traffic:

Airline Industry impact analysis from North Korea’s thermonuclear test and geopolitical tensions

In contrast, we expect Chinese travel demand on US routes to weaken as escalating trade tensions are likely to curb Chinese outbound tourism to the United States. Passenger traffic on Taiwan routes will be soft as well in the run-up to the municipal and local elections in November 2018. See our previous reports on this:

Will China unleash tourism curbs against US in escalating trade war?

Winners & Losers from worsening China-Taiwan tensions

Air travel demand to Australia will remain robust but the market suffers from industry overcapacity and resultant yield pressure on these routes.

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Independent Research Declaration: Crucial Perspective does not own any position in the equities featured in this report nor have we received any compensation for writing this report. 

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