With a loss of more than 420 billion yuan in four years, excess capacity and slowing demand, what will happen to China's civil aviation in the future

2023 is the fourth consecutive year of losses for China's civil aviation.

In the three years of the epidemic, the cumulative loss of the entire civil aviation industry exceeded 400 billion, and although the loss will be greatly reduced in 2023, it will still fail to turn losses into profits, with a loss of 28.8 billion yuan in the whole industry, of which 17 billion will be lost by airlines.

The number of civil aviation passengers, especially international passengers, has not yet recovered to pre-pandemic levels, which is one of the important reasons why airlines have not been able to turn around their losses. By the end of 2023, the volume of international flights will only recover to 55.8% of the pre-pandemic level of 2019, and a large number of wide-body aircraft that were originally going to fly international flights will be forced to return to the domestic market to grab the market, which will further affect the revenue of the domestic market.

However, from the perspective of aircraft introduction, by the end of 2023, the number of aircraft in China's civil aviation will reach 4,200, an increase of 35 aircraft from 2022 and 382 aircraft from 2019, but the passenger volume in 2023 has not yet recovered to the level of 2019.

"In the analysis of the market in the past two years, there is almost no need to consider the problem of supply, the supply must be excessive, and the growth of supply must be slow. Tang Chao, a person in the civil aviation industry, pointed out to reporters.

Introduce while lying on the nest

The new crown epidemic that began in 2020 has had a huge impact on the civil aviation industry. In January of that year, the number of flights and the load factor began to decline sharply, and there was even a rare situation of zero passengers on a flight to Sanya.

This was followed by a large number of domestic flight cancellations, as airlines found that they were losing more and more money. By the end of February, the Chinese market had hit a low point, with nearly 90% of flights being cancelled.

As countries have closed their borders, international flights have also begun to fall off a cliff. By April 2020, the Civil Aviation Administration of China (CAAC) began to follow the work deployment of the joint prevention and control mechanism of the State Council and issued the "Five Ones" policy to reduce international passenger flights: each airline can only operate a route to any one country in Chinese mainland, and only one route can be retained, and each route shall not operate more than one flight per week.

According to the Civil Aviation Statistical Bulletin, the number of passengers transported in 2020 was only 420 million, down 36.7% from 2019 and the first annual decline in passenger traffic since 1989. Among them, 408 million passengers were transported on domestic routes, down 30.3% from 2019, 961,300 passengers were transported on Hong Kong, Macao and Taiwan routes, down 91.3% from 2019, and 9,565,100 passengers were transported on international routes, down 87.1% from 2019.

2020 was not the lowest year for passenger arrivals, which increased in 2021 but fell sharply in 2022, with only 250 million passengers for the year, lower than a decade ago. (320 million passengers in 2012)

The rapid decline in flight and passenger traffic has caused a large number of aircraft to be forced to lie on their stomachs, such as Hainan Airlines, which revealed that at one point 96 aircraft were grounded for a long time. The industry's aircraft utilization rate also bottomed out in 2022, falling from more than 9 hours before the pandemic to just 4.35 hours.

While a large number of aircraft are lying in the nest, the number of aircraft in China's civil aviation has continued to grow during the three years of the epidemic:

At the end of 2019, the number of passenger aircraft in China's civil aviation increased to 3,645, which increased to 3,717 in 2020, 3,856 in 2021, 3,942 in 2022, and 4,013 in 2023.

This is not unrelated to the time lag between aircraft ordering and delivery. After the airline signs the aircraft order, a future delivery date is determined, and if the airline does not want to take delivery of the aircraft within the delivery period agreed in the contract, it needs to communicate with the aircraft manufacturer to see if it can postpone the delivery, and the manufacturer will also agree to delay the delivery of some aircraft in view of the long-term cooperation, but it cannot be postponed indefinitely.

The extreme imbalance between supply and demand has brought about a direct result of the industry's huge losses for three consecutive years: a loss of 97.432 billion in 2020, a loss of 84.25 billion in 2021, and a loss of 217.44 billion in 2022. Three years to lose the money earned in the past ten years.

Entering 2023, with the relaxation of epidemic control, the planes in the nest have also returned to the blue sky one after another, and the number of domestic flights and passengers has also rapidly exceeded the epidemic period.

However, the resumption of international flights has been slower than expected. According to the statistics of Flight Steward, the overall recovery of civil aviation international passenger flights in 2023 will only be 37.5% of that in 2019, from less than 10% at the beginning of the year to 55.8% at the end of the year.

The pattern of "ice and fire" on domestic and international routes has also made the overall passenger traffic in 2023 not exceed the pre-epidemic level, only recovering to 93.9% of 2019 levels.

However, the number of passenger aircraft at the end of 2023 reached 4,013, 368 more than in 2019, an increase of more than 10%. The recovery of capacity has been faster than the recovery of passenger volumes, and airlines' daily aircraft utilization and load factor have not returned to pre-pandemic levels: the average daily aircraft utilization rate of domestic airlines in 2023 is 8.1 hours, 1.2 hours lower than in 2019, and the average load factor is 77.9%, 5 percentage points lower than in 2019.

"To see whether there is excess capacity, the core indicators are the daily utilization rate and passenger load factor of the aircraft, the daily utilization rate of the aircraft represents the recovery rate of production capacity, and the passenger load factor represents the recovery rate of the market. Lin Zhijie, a civil aviation industry insider, pointed out to the first financial reporter that he believes that if the daily utilization rate is more than 0.5 hours lower than that in 2019, and the passenger load factor is 5 percentage points lower, it is still excess capacity.

Pre-pandemic growth has slowed

While the overcapacity in 2023 is closely linked to the slow recovery of international markets and the continued delivery of new aircraft, a look at passenger volume and capacity growth over the past decade shows that China's civil aviation has slowed from double-digit growth to single-digit growth before the pandemic.

The reporter consulted the data of the Civil Aviation Statistical Bulletin since 2013 and found that before 2019, both the annual growth of passenger volume and the annual growth of capacity were more than 10%, such as the average annual growth of passenger traffic in the five years from 2013 to 2017 was 11.5%, the year-on-year growth of passenger volume in 2017 reached 13%, and the year-on-year growth of 2018 increased by 10% compared with 2017. The annual growth rate of capacity in the past five years has also been basically the same as the growth rate of passenger traffic.

But since 2019, passenger growth has slipped to single digits, up 7.9% from 2018, when capacity grew even less year-on-year, at 4.9%.

In this regard, Lin Zhijie analyzed that the single-digit growth of passengers in 2019 is due to market reasons, but more is still insufficient capacity, and the capacity growth in 2019 is much smaller than the growth of passenger volume, which is related to the global grounding of Boeing 737MAX because of two foreign crashes, which is equivalent to reducing the introduction of 250 aircraft. At that time, Chinese airlines grounded a total of 97 737 MAX aircraft, and deliveries of new 737 MAX aircraft were suspended at the same time.

The increase in capacity was much smaller than the increase in passenger volume, which also made China's civil aviation still earn 54.13 billion yuan in 2019, an increase of 5.76 billion yuan over 2018.

However, a number of industry insiders pointed out to the first financial reporter that it is no accident that the passenger growth in 2019 has slowed to single digits, and China's civil aviation has gone through a stage of rapid growth.

"According to historical experience, there is a dynamic change and stable elasticity coefficient between the growth rate of civil aviation passenger traffic and the GDP growth rate, which is the potential growth rate of the civil aviation market. We have counted the data of the growth rate of civil aviation passenger traffic and GDP in mainland China since 1978, and the data shows that the elasticity coefficient between the two has shown a phased downward trend, and has experienced two stages: ultra-high speed and high speed growth. Since 2019, it has entered a new stage of medium-speed growth, and the elasticity coefficient has remained at about 1.3:1. Tang Chao told reporters that the mainland economy will grow by about 5% in 2023, while the domestic civil aviation passenger traffic will only increase by 1.5% compared with 2019, far from reaching the potential growth level of the mainland civil aviation market.

The report of Qunar Research Institute also has the same view: before 2019, the growth rate of passenger volume in the domestic civil aviation market was almost twice the growth rate of GDP, but after the epidemic, this influence is gradually weakening, and from the situation in the third quarter of 2023, the domestic civil aviation passenger volume compared with the recovery rate in 2019 no longer maintains a two-fold growth rate of GDP, but gradually approaches one to one.

For the year 2024 that has arrived, Song Zhiyong, director of the Civil Aviation Administration, predicted at the 2024 Civil Aviation Work Conference that transportation production in 2024 will return to natural growth. It is expected that the annual passenger traffic volume of domestic routes will reach 630 million, 7.7 percentage points higher than in 2019, coupled with the introduction of visa-free travel and a series of entry and exit facilitation policies and measures from the mainland, the international passenger transport market will accelerate its recovery, and it is expected to reach about 6,000 flights per week by the end of 2024, recovering to about 80% of the pre-epidemic level.

However, many industries are still not optimistic about the market. According to the reporter's understanding, the general manager of a domestic airline predicted at its internal annual work meeting that the industry will increase 150 aircraft in 2024, and the recovery of capacity relative to 2019 will still be greater than the recovery rate of passengers, and the industry competition will be more intense;

Zou Jianjun, a professor at the Civil Aviation Management College of China, also believes that the air transport market in 2024 may not be too optimistic, and the first quarter may be better than 2023, but the third quarter (the concentrated release of pent-up demand in the summer of 2023) may be "unsatisfactory", and "climbing over the hurdles" will be a true portrayal of the industry throughout the year.

"The growth target set by the Civil Aviation Work Council for 2024 is that the total transport turnover, passenger traffic and cargo and mail traffic will reach 136 billion ton-kilometers, 690 million passengers and 7.6 million tons respectively, compared with 2023, the annual growth rate must reach 14.4%, 11.3% and 3.3% respectively, and the benchmark for 2019 requires an increase of 5.2%, 4.5% and 0.9% respectively. Although the growth rate is not large compared to the pre-pandemic period, considering the current development environment of the global economy and the aviation industry, the challenge of achieving the goal is still very large. Zou Jianjun further pointed out.

What to do in the future

"At present, the market has a stage of excess capacity and a slowdown in demand, so the industry needs to control the growth of capacity to match the demand of the market and avoid the continued overcapacity," Lin Zhijie suggested, "The second is to increase the flexible allocation of capacity and market policies, because the current market recovery of the customer base is unbalanced, regional imbalance, stage imbalance is more prominent, such as international routes, some places have a recovery rate of more than 100%, and some places have only recovered 20% This requires us to make flexible allocation of capacity and market sales, and also needs the green channel of the Civil Aviation Administration's air traffic right time policy, which is also a new test. ”

It is worth noting that in the "14th Five-Year Plan" civil aviation development plan, it is clearly mentioned that it is necessary to "scientifically regulate the total number of moments and the speed of fleet introduction to ensure the dynamic balance of overall supply and demand", and the expected target for the growth of passenger traffic in the six years of 2020~2025 based on 2019 is that the average annual growth rate is only 5.9%.

"For the entire industry, the current consensus is to suppress the growth of supply, and wait for the recovery of demand," Tang Chao told reporters, "The three years of the epidemic, until 2023, the average annual compound growth rate of aircraft introduction in the industry is only 2.1%, which is far lower than before the epidemic, and the average annual growth rate in 2024 and 2025 is also expected to be below 3%." And the number of airlines voluntarily withdrawing older aircraft will also increase. ”

According to the first financial reporter, China Southern Airlines will sell 7 Airbus 330-200 passenger aircraft in 2023, and the company's wide-body fleet size will be reduced by 2 aircraft, and the company will continue to choose the opportunity to withdraw some models in 2024 and reduce the scale of wide-body aircraft.

The reason why the old models that have withdrawn are mainly wide-body aircraft is because wide-body aircraft are mainly used to fly international routes, and the speed of recovery of international routes makes wide-body aircraft more surplus than narrow-body aircraft, and wide-body aircraft that cannot fly internationally return to China to grab the market, which also accelerates the "involution" of the domestic market.

According to the statistics of Flight Steward, in 2023, the number of flights operated by continental wide-body passenger aircraft will increase by 5.5% year-on-year compared with 2019, and the flight structure will change greatly, among the types of flights it operates, the proportion of domestic flights will increase from 60.1% to 79.8%, an increase of 19.7 percentage points, and the share of the domestic market (all domestic flights) will also increase from 4.6% in 2019 to 6.3% in 2023.

The Civil Aviation Administration can also affect the growth rate of the industry through the regulation and control of aircraft introduction approvals. At the 2024 Civil Aviation Work Conference, "actively promoting the refined and differentiated management of the fleet, giving full play to the effectiveness of the mechanism of rewarding the good and punishing the inferior in the introduction of aircraft, guiding enterprises to optimize the fleet structure based on market demand, rationally arranging the delivery of capacity, and ensuring the coordinated matching of fleet growth and the industry's key resource support capabilities" has also become one of the key tasks in 2024.

The flight steward team pointed out in the macro forecast, civil aviation analysis and micro outlook report for 2024 that the civil aviation industry has gradually bid farewell to the past high-speed growth stage, and the model of simply relying on the input of production factors to have good returns in the past is no longer sustainable, for 2024, recovery is no longer the main theme, and the value of innovation will be gradually reflected.

According to the reporter's understanding, at present, some domestic routes have begun to study the product portfolio of different personalized passenger needs according to the characteristics of subdivided channels, such as direct sales channels based on the differentiated travel characteristics of private domain customer groups, the launch of products such as flying with your heart and student travel, and the distribution channels are based on the high-quality travel needs of business customers, and the launch of travel packages and other products. Precision marketing through the development of accurate and flexible customized pricing and differentiated products.

"The recovery of the market in the future will definitely not be a simple replication of the pre-epidemic situation, but will face comprehensive structural changes, including the domestic route market and the international route market. Zou Jianjun pointed out to reporters that therefore, adapting to the current Chinese national conditions, focusing on the experience economy, adhering to the demand-centered, focusing on operational efficiency and development benefits, should be the focus of the current supply-side structural reform of civil aviation.