Chinese airlines: 3Q17 capacity growth risks hurting yields after favourable 1H17

18 July 2017, China – The major Chinese airlines just reported their 1H17 operating statistics, reflecting robust traffic growth of 11%. This is in line with our expectations and supports fairly favourable financial results in late August. We remain bullish on the sector’s long-term outlook. However, a new concern we have is that domestic capacity growth is accelerating in 3Q17 which could hurt passenger yields if not matched by demand. The mitigating factor is that there is greater flexibility in adjusting domestic capacity quickly compared to international routes. China Southern Airlines has the largest domestic capacity exposure.

3Q17 OPERATING OUTLOOK

MORE AGGRESSIVE CAPACITY EXPANSION ON DOMESTIC ROUTES IN 3Q17 COULD POTENTIALLY PUT PRESSURE ON YIELDS IF TRAVEL DEMAND GROWTH DOES NOT ACCELERATE

We noticed that the overall Chinese airlines’ planned capacity growth on domestic routes is accelerating in 3Q17, rising 14% y/y compared to 10% y/y in 1H17. If not matched by a corresponding rise in domestic passenger travel demand, the Chinese airlines may have to offer more promotional fares to fill up the additional capacity which could hurt passenger yields on domestic routes. The mitigating factor is that domestic capacity tends to have much greater flexibility and can be adjusted fairly quickly to match travel demand compared to international routes. China Southern Airlines (1055:HK) has the largest exposure to domestic routes in the Chinese airline sector.

Chart: Planned capacity growth on China’s domestic and international routes (3Q17)

Chart: Planned capacity growth on China’s domestic and international routes (3Q17)

 

COMPETITION ON CHINA-SOUTHWEST PACIFIC ROUTES IS LIKELY TO INTENSIFY

The overall planned capacity growth on international routes to/from China is likely to be around 10% y/y in 3Q17, continuing at the same pace as 1H17.

However, we are concerned about the aggressive capacity growth (+31% y/y in 3Q17) on China-Southwest Pacific routes, even higher than 1H17 growth pace of 19% y/y. This is likely to assert further pressure on passenger yields on these routes.

China Southern Airlines has the largest capacity exposure on China-Southwest Pacific routes and could therefore suffer the greatest impact among the Chinese carriers.

 

GROWTH FOCUS ON CHINA-ASIA ROUTES RESUMES

Planned capacity growth on China-Asia routes is expected to more than double to 11% y/y in 3Q17 from 5% y/y in 1H17, mainly driven by surging capacity on China-Southeast Asia routes. China Eastern Airlines (670:HK) has the largest capacity exposure on China-Southeast Asian routes.

 

MODERATING CAPACITY GROWTH ON CHINA-NORTH AMERICA ROUTES IS POSITIVE AND COULD HELP EASE YIELD PRESSURE

Planned capacity expansion on China-North America routes is expected to moderate to 11% y/y in 3Q17 from 16% in 1H17. This is positive as it could help ease competition and yield pressure. Air China (753:HK) has the largest capacity exposure on China-North America routes among the Chinese carriers and could benefit from easing competition. This is closely followed by China Eastern Airlines.

CHINA-EUROPE CAPACITY GROWTH REMAINS FAIRLY MODERATE

China-Europe routes’ capacity growth is more manageable at 5% y/y, similar to the growth pace in 1H17. Air China has the largest capacity exposure on China-Europe routes among the Chinese carriers.

 

REVIEW OF 1H17 FAVOURABLE OPERATING PERFORMANCE

 

DOMESTIC ROUTES’ PASSENGER TRAFFIC GREW SLIGHTLY AHEAD OF INTERNATIONAL WHILE THE DEMAND DECLINE ON REGIONAL ROUTES CONTINUED IN 1H17

The major Chinese airlines’ passenger traffic grew 11% y/y in 1H17. Passenger traffic on domestic routes rose 11% y/y, slightly ahead of the 10% growth on international routes while traffic continued to decline (down 5% y/y) on regional routes to/from Hong Kong, Macau and Taiwan for the major Chinese airlines.

Among the major Chinese airlines that just reported their 1H17 operating statistics, Spring Airlines continued to achieve the strongest growth, with passenger traffic up 29% y/y in 1H17, followed by China Southern Airlines (+12%), China Eastern Airlines (+10%) and Air China (+7%).

 

Chart: Major Chinese airlines passenger traffic RPK growth (1H17)

Chart: Major Chinese airlines passenger traffic RPK growth (1H17)

 

PASSENGER LOAD FACTORS IMPROVED FOR THE BIG 3 CARRIERS BUT WEAKENED SLIGHTLY FOR SPRING AIRLINES

The overall passenger load factor improved 1ppt y/y to 82% for the major Chinese airlines. Apart from Spring Airlines whose passenger load factor fell 1ppt y/y to 92% (which still ranks the highest in the Chinese airline industry), the Big 3 Chinese carriers’ passenger traffic growth were all ahead of their capacity growth which helped to lift their passenger load factors. China Southern Airlines’ passenger load factor improved the most (+2ppts y/y to 82%) among the major Chinese carriers, followed by Air China (+1ppt y/y to 81%).

 

Chart: Major Chinese airlines passenger traffic and capacity growth (1H17)

Chart: Major Chinese airlines passenger traffic and capacity growth (1H17)

 

Chart: Major Chinese airlines passenger load factors (1H17)

Chart: Major Chinese airlines passenger load factors (1H17)

 

 

Related Articles:

Air China (753:HK) Initiation Research Report 2017: Top choice among the Chinese airlines

China Eastern Airlines Initiation Research Report 2017: Rapid improvement but aggressive expansion risk abounds

Read: China Southern Airlines Initiation Research Report (10th April 2017) 

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