China's Big Three
Geared for Re-opening
Nov/Dec 2022
The three national flag carriers of China — Air China, China Southern and China Eastern — seem to have had as tough a time as any airline through the pandemic. In 2020 and 2021 the three airline groups reported total losses of RMB(40)bn (US$6bn) on revenues 40-50% down from 2019 levels giving negative net margins of 18%. And in the first nine months of 2022 they reported a further RMB(80)bn loss on even lower revenues — a negative margin of 54%.
But unlike their peers elsewhere in the world, the three have not felt the need to react to the crisis with extensive restructuring.
The numbers of employees at the end of 2021 were only 3% below the levels at the end of 2019 (down by 1-2% at Air China and China Eastern, but 6% at China Southern).
The three, while parking some aircraft, have continued to take deliveries and expand their fleets (although China Southern took the opportunity to dispose of its A380 and 747 four-engined widebodies). The current total operating fleet of 2,594 aircraft is 180 units higher than it had been pre-pandemic.
And while the 737MAXs remain grounded in China, the three airline groups in July 2022 announced orders for 300 A320neos for delivery from 2023 (and China Eastern has taken delivery of its first Comac C919).
| Air China | China Southern | China Eastern | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In service (†) | Δ v 2019 | On order | In service | Δ v 2019 | On order | In service | Δ v 2019 | On order | ||||
| A320 | 346 | (19) | +56 | 96 | 343 | (19) | +26 | 96 | 377 | (20) | +49 | 100 |
| A330 | 59 | (10) | -6 | 40 | (7) | -7 | 56 | (4) | -- | |||
| A350 | 23 | (7) | +13 | 8 | 16 | (2) | +10 | 6 | 15 | (7) | +8 | 6 |
| A380 | -- | -5 | -- | |||||||||
| 737 | 396 | (50) | -9 | 397 | (62) | -4 | 34 | 286 | (26) | -16 | ||
| 747 | 13 | (6) | +3 | -2 | 2 | -- | ||||||
| 757 | 4 | (3) | -1 | -- | -- | |||||||
| 777 | 36 | (6) | +8 | 5 | 30 | (2) | +3 | 33 | (5) | +13 | ||
| 787 | 14 | (5) | -- | 39 | (3) | +2 | 10 | -- | ||||
| ARJ21 | 15 | (4) | +15 | 20 | (3) | +20 | 15 | (2) | +15 | |||
| C919 | -- | 5 | -- | 5 | 1 | +1 | 9 | |||||
| ERJ | -- | 6 | (2) | -14 | 2 | +2 | ||||||
| Total | 906 | (110) | +79 | 114 | 891 | (100) | +29 | 141 | 797 | (64) | +72 | 115 |
Traffic
When the pandemic hit in early 2020, and following the Wuhan lock-down, traffic demand evaporated. But, lulled into the security of the zero-covid policies, domestic passenger traffic (which pre-pandemic accounted for 83% of total passenger numbers) started to recover and by September 2020 had returned to similar levels seen in the sane period of 2019 (see chart).
The spread of the Covid “Delta” variant over that winter, along with associated local travel restrictions caused a blip with traffic slumping to around 50% of 2019 levels. The annual Spring Festival travel rush, known as chunyun — the world’s largest annual human migration — which takes place of 40 days surrounding the Lunar New Year. was particularly hard hit with people encouraged only to travel if the trip were essential. The chunyun in a normal year would involve nearly 3bn passenger trips, but in 2021 is estimated to have been half the normal.
There was some modest recovery to 2019 levels in the Spring of 2021, but with the spread of the omicron variant and zealous application of covid containment measures, domestic passenger traffic has remained well subdued during 2022 fluctuating erratically between 15% and 60% of 2019 levels.
With the country’s borders effectively closed by its zero-covid policy, and severe capacity restrictions imposed by the CAAC through its “five-one” policy (allowing mainland carriers to fly just one flight a week on one route to any country and foreign airlines to operate just one flight a week to China), international traffic — normally accounting for 15% of the big three’s total passenger numbers — has been virtually non-existant. In November 2022 international passengers had recovered to a level only 4% of that seen in 2019.
The third traffic area that the three carriers are obliged to report cover “Regional” services — flights to Hong Kong, Macau and Chinese Tapei. In a normal year these would accounting for 5% of the big three’s passenger numbers. For the past two years traffic on these routes had remained roughly 80-90% below 2019 levels, not only because of quarantine requirements but also because China had imposed capacity limitations.
All the restrictions are now being blown away — save for a requirement for preflight testing — and routes to Hong Kong and Macau could quickly return to “normal”. (Cross-Straits travel to Taiwan may continue to be affected by geopolitical tensions.)
Finances
The three airlines had ended 2019 in reasonable financial health (see table): strong net asset positions, and acceptable net debt ratios. But their cash position were suboptimal: Air China had RMB8.9bn in cash, equivalent to 6.6% of annual revenues, but China Southern and China Eastern had balances equivalent to only 1% of their annual revenues.
| Air China | China Southern | China Eastern | ||||
|---|---|---|---|---|---|---|
| RMBm | Sep 22 | Dec 19 | Sep 22 | Dec 19 | Sep 22 | Dec 19 |
| Cash | 14,578 | 8,935 | 21,456 | 1,849 | 23,575 | 1,350 |
| Net Assets | 35,336 | 101,330 | 66,088 | 77,329 | 25,084 | 72,646 |
| Cash % revenues | 24.6% | 6.6% | 23.0% | 1.2% | 45.7% | 1.1% |
| Net debt/equity | 4.33x | 1.29x | 2.10x | 2.11x | 6.61x | 2.21x |
| RMBm | Air China | China Southern | China Eastern |
|---|---|---|---|
| Net income | (67,051) | (40,978) | (53,984) |
| Operating cash flow | (1,782) | 17,686 | 6,643 |
| Capex | (26,105) | (28,081) | (9,857) |
| Other investing cf | 134 | 1,541 | 1,544 |
| Inc in Debt | 37,983 | 5,479 | 17,808 |
| Dividends | (5,768) | (6,173) | (4,946) |
| Equity | 490 | 22,546 | 11,083 |
| Total cash flow | 4,840 | 13,037 | 22,211 |
Naturally they were all supported by their shareholding government entities. (For the complexities of the ownership structure of aviation in China see Aviation Strategy, Jul/Aug 2019). Air China only received RMB490m in equity over the past three years, but China Eastern was given RMB11bn and China Southern RMB22.5bn.
Capital expenditure has remained strong. Air China cut its spending in 2021 and 2022 to half the levels of 2019 but still managed to fork out a net RMB26bn over the past three years, similar to the net capex of RMB28bn at China Southern. The smaller China Eastern only expensed a net RMB10bn, helped by inflows of nearly RMB12bn from asset sales and novation of purchase rights in 2021.
Debt levels have risen and shareholders' funds have shrunk. China Southern, thanks to its large equity injection, has seen its net assets fall by only 15% and its net debt/equity ratio little changed from 2019. Air China and China Eastern have seen their shareholders' funds fall by two-thirds, but are still in positive territory.
With China’s abandoning its zero-covid policy the country’s big three seem ready to resume their inexorable growth.
