According to the data disclosed at the 2024 National Civil Aviation Work Conference, the whole industry will achieve a loss reduction of 187.2 billion yuan in 2023. Comparing the historical data of the loss of 216 billion yuan in China's civil aviation industry in 2022, it can be estimated that the loss of China's civil aviation industry in 2023 will be about 28.8 billion yuan, which will be the smallest loss year in the four years after the outbreak of the epidemic (reference: the loss of the whole industry in 2020 was 97.4 billion yuan; the loss in 2021 was 84.2 billion yuan; and the loss in 2022 was 216 billion yuan).
As a large state-owned airline with the largest volume in China's civil aviation map and the most decisive and corroborating function for the whole industry, Air China, China Southern Airlines and China Eastern Airlines have recently announced their 2023 performance forecasts:
Air China expects to achieve net profit attributable to shareholders of listed companies of -900 million yuan to -1.3 billion yuan (loss of 38.619 billion yuan in 2022)
China Southern Airlines expects to achieve net profit attributable to shareholders of listed companies of -3.5 billion yuan to -4.7 billion yuan (loss of 32.682 billion yuan in 2022)
China Eastern Airlines expects to achieve net profit attributable to shareholders of listed companies of -6.8 billion yuan to -8.3 billion yuan (loss of 37.386 billion yuan in 2022)
In terms of data, although the three largest airlines performed well in the third quarter of last year (especially under the strong support of the summer peak) and the first three quarters, and even achieved phased profits, the total profit of the whole year and the overall goal of turning losses into profits were unfortunately missed.
This result also reflects the dynamic and changeable complex environment faced by the three major airlines and the entire Chinese civil aviation industry in the past year, highlighting the difficulty of civil aviation, as an industry highly sensitive to the external economic and political environment, to gradually recover from the historical heavy blow caused by the epidemic.
This article also takes advantage of the release of the annual performance forecasts of the three major airlines to review some of the key aspects of the recovery process of China's civil aviation in 2023.
First, the domestic market has basically recovered or even partially surpassed, but the pressure on the international market is still huge, and the impact on the financial results of the three major airlines, which has a large proportion of international networks, is very obvious.
Judging from the final carrier results, the passenger volume of mainland civil aviation will complete 620 million passengers in 2023, and the overall recovery will be 93.8% of 2019. However, the domestic and international/regional markets are separated, and they are properly both ice and fire:
The number of passengers transported on domestic routes was 580 million, which has exceeded 1.5% compared with 2019.
International/regional routes are expected to complete 36 million passengers, a decrease of 58.3% compared to 2019 (recovery rate of 41.7%)
From the perspective of the monthly recovery trend, the two markets are also significantly different:
The domestic market recovered rapidly: After the relaxation of epidemic restrictions at the end of 2022, the market has experienced a period of adaptation and adjustment, surpassing the same period in 2019 from April. During the summer transportation period, it reached a peak, exceeding 2019 by more than 10%, and entered the off-season in the fourth quarter, which declined;
The recovery of the international/regional market has lagged behind, and the response rate in January last year was even in the single digits. However, the entire 12-month process showed a steady increase trend, and by the end of the year, the monthly recovery rate had exceeded 6%. Although the overall level for the year is still only 41.7% of 2019, the continued upward trend is still encouraging
Civil Aviation Authority data
Behind the above results of actual carriage volume is the adjustment of the structure of the air network and the adaptation of capacity to local conditions of Chinese airlines, especially the three major airlines that have more weight on the capacity supply and actual trend of the entire market, and the overall presentation of the idea of driving demand with supply. They have achieved these results by shifting their focus to the domestic market and fully meeting all potential air travel needs with the widest possible route network and the highest possible operating frequency.
Correspondingly, in terms of specific operating results, especially domestic, it is not unintentional that capacity growth has outpaced the growth in volume, which is also echoed by the higher growth rate in the number of flights and the overall decline in load factor.
Civil Aviation Authority data
Here's an important discussion: In such a recovery process, is it worth it for airlines to drive demand by committing capacity at a faster rate, even if it means lower load factors and more challenging financial outcomes?
In the Chinese market, the short answer is: it is worth it and necessary. The most important logical points are:
1) The extension of the aviation network and the increase in flight frequency are necessary means for China's civil aviation to protect and further catalyze the flame of air travel from weak to strong. After the relaxation of epidemic control, the development of all walks of life and the circulation of people are re-establishing a new stage of normalcy, and the rigidity of many trips has not yet fully recovered, and the convenience of travel (the most important thing is that the air network can be reached and the time is abundant) is very important to re-establish a new normal of air travel with a positive cycle. The combination of Guangzhou Aviation Network + multi-time can connect potential and dispensable air travel to the greatest extent, eliminate psychological concerns with rich supply, and transform it into definite air travel. Even if the passenger load factor has decreased, it has supported the willingness to travel by air and maintained the convenience of air travel, which is an important asset for further recovery and development.
2) In terms of operation, the offset of additional income and operating costs brought by continuous operation, as well as the continuous demand and operation of various positions in civil aviation, the comprehensive and social benefits are far due to the weakening of various needs and job changes associated with active shutdown. This is more of a pattern that is considered from a comprehensive perspective. As a central enterprise, the three major airlines, in addition to the continuous promotion and survival of the airline's own positions, are also of great significance to the direct and indirect drive of various members of the civil aviation ecology such as airports, aviation food, aviation fuel, aviation materials, etc. This is the embodiment of the unique social responsibility of central enterprises in China's civil aviation market, and it is an ecological stability and integration mechanism that cannot be achieved in the civil aviation market of many other countries.
These are integrated decisions that are not purely financial result-oriented in order to enhance the availability of air transport.
International/regional routes, which can contribute about one-third of revenue in a regular year for the three major airlines, will still face a challenging recovery in 2023. According to the research report, as of mid-2023, the ASK capacity investment of the three major airlines on international routes is only about 1/3 of the level of the same period in 2019.
Among them, there are also significant differences in the recovery rate of flights departing from China depending on the destination country.
According to the data on the recovery rate of flights in China's major overseas destinations in November 2023:
U.S. routes, which have historically contributed significantly to international revenues and profits, have a recovery rate of only 18% due to geopolitical influences
Japan, which used to be an important overseas tourist destination for China, especially in East China, has only recovered to 40% of 2019 flights due to a series of factors such as nuclear wastewater discharge and fluctuations in bilateral relations.
The South Korean market has also been affected by the weakening relations between China and South Korea, and the overall recovery has reached nearly 70%
Although Thailand, an important tourist destination in Southeast Asia, has made a lot of facilitation explorations in terms of visas and other aspects, the vicious personal safety accidents that occurred to Chinese tourists still show a considerable negative impact, and the flight recovery rate in that month was only 43% of the level in 2019. Among the major international routes, only Italy has surpassed the same period in 2019, but the impact of its overall international business will be limited.
Flight volume recovery rate of major overseas destinations in November 2023 (flights departing from China)
Corresponding to the structure of the international network of the three major airlines, such a large difference in the level of recovery will have a different degree of practical impact on them.
As far as China Eastern Airlines is concerned, it has made a lot of profits on the economic, trade and tourism routes of the United States, Japan, Thailand and South Korea. As a result of the unsatisfactory recovery of these routes, many aircraft with large payloads have been diverted to domestic routes, but they have not been able to present the best economics on domestic networks where the average range is slightly weaker, ultimately affecting the recovery of international revenues and the full amortization of fixed costs.
2. The cost of jet fuel in 2023 will be relatively high, posing a certain financial challenge to both global and Chinese airlines
Jet fuel prices have always accounted for the largest proportion of the cost structure of global airlines, generally accounting for about one-third. Small fluctuations in fuel prices can lead to significant changes in an airline's cost structure, which can have a direct impact on the performance of the final profit.
The long-term jet fuel price tracker provided by IATA shows that global oil prices generally rose after reaching a relative location in May 2020, peaked in early summer 2022, and then fluctuated downward, but remained significantly higher than the level in the first quarter of 2022 and significantly higher than the pre-pandemic level. Entering 2023, there was an unusual surge in February, followed by a volatile downward movement to a relative low in May, and then climbed again to reach a second high in September. On average, oil prices in 2023 have generally eased from the all-time highs presented in 2022, but are still significantly higher than pre-January 2020 levels.
To a certain extent, this has contributed to the significant loss reduction of China's civil aviation in 2023 compared to 2022, but compared with the pre-epidemic period, fuel prices in 2023 are still a burden on airlines' costs, and it is also related to the loss for the whole year.
IATA Jet Fuel Price Monitor
3. In 2023, air cargo will still be in the dividend period, and the financial results of the three airlines will have different impacts due to the equity structure.
In 2023, although global air cargo has bid farewell to the explosive growth period of the first two years of the epidemic, it will still enjoy special development dividends under new boosting factors such as cross-border e-commerce.
However, with the mixed-ownership reform and listing of China Eastern Airlines Logistics (China Eastern Airlines Logistics completed its listing on June 9, 2021), the actual air cargo revenue and profit have no longer been consolidated into the company, which is also an important difference from the first year when the epidemic first occurred. The air cargo business, which played a key hedge against the overall revenue/profit decline, can no longer bring any positive pull to the 2023 annual report. In the first three quarters of 2023, the net profit of China Eastern Airlines Logistics reached 1.665 billion yuan.
Fourth, in 2023, there will be a lot of work with long-term strategic value to promote China's civil aviation, which will have a practical impact on the short-term financial situation of airlines
A very strategic work in China's civil aviation market in the past two years is to further test/run in and accumulate operational experience in commercial flight practice of the C919, so as to move towards mass production and delivery as soon as possible. China Eastern Airlines, which plays the role of a cornerstone airline customer, will bear a large amount of upfront cost investment in the process, which will have a realistic impact on the financial situation in recent years.
The initial operation of a new aircraft type on a route involves the construction of a full set of support capabilities for alternate airports distributed along the route, in addition to the necessary take-off and landing support and comprehensive support for aviation catering, aviation fuel and aviation materials necessary for OD airports. The safety and stability guarantee requirements of civil aviation operations are extremely high, and behind the resources required for normal operations are multiplied resources in place to deal with the occurrence of any small probability events. Especially for the significant C919, the guarantee coefficient is even stricter. In addition to the visible C919 destinations such as Shanghai Hongqiao, Chengdu Shuangliu and Beijing Daxing, China Eastern Airlines has personally visited many airports to lead them to establish a consistent C919 comprehensive support system. The itinerary and finalization process of various specific operating rules related to C919 is more complicated, and it is also promoted and led by China Eastern Airlines as a starting customer, exploring while operating.
The C919 is the most important weapon of civil aviation, and China Eastern Airlines, as the cornerstone of the start-up of customers, has led the construction of the large, complex and stable comprehensive support capabilities it needs, which means solid financial expenditure (for details, please refer to "Spreading Wings in the New Country, China Eastern Airlines Strongly Supports C919 to Soar to a Broader World").
Above, we have selected several important common edges and analyzed some of the reasons why China's three major airlines will still not be able to fully turn around their losses in 2023.
Heading into 2024, the divergence between domestic and international markets remains an important theme of the year, facing different opportunities and uncertainties:
In terms of the domestic market, the recovery of travel intentions is more certain and strong. The 2024 Spring Festival travel is proving to be significantly stronger than the pre-pandemic level in 2019, and the 40-day Spring Festival travel is expected to create a new high in the history of China's aviation Spring Festival"Air Travel Services: A Product Sector Worthy of Activating More Strategic Value by Chinese Airlines")
In the international market, on the one hand, there is still a lot of uncertainty about the direction of the bilateral relationship between China and the United States, and flights are still running at a low level, but at the same time, more and more countries are opening up their visa-free entry policies to Chinese citizens, and eagerly await a stronger recovery of the huge number of international tourists from China (before the pandemic). Singapore, which has just announced a trial visa exemption for Chinese citizens from the Lunar New Year, will experience a surge in air ticket and hotel searches and bookings, which is likely to continue in 2024, becoming an important driver for the further recovery of Chinese airlines' international business.
If there are no major accidents in the domestic market in 2024, airlines will do a good job in revenue expansion (new routes, newly upgraded express line rarities, new tourism-themed products, etc.), high-speed rail competition and cooperation, and lean control of operating costs, and at the same time, on international routes, dynamically and flexibly deploy capacity by specific routes and design corresponding air tickets and travel products to closely track each recovery band, it is still quite expected to finally achieve a turnaround in 2024.
In the face of the future, we will firmly make the best expectations, and in the face of the dynamic operation that moves in seconds, we will prepare for the worst in awe. I believe that the moment of break-even will come as soon as possible with the combined blessing of strategic determination and operational endurance!