Chinese carriers are chasing the vapour trails of the rest of the airline industry as international travel picks up again with the easing of Covid-19 restrictions.
The number of passengers taking foreign trips with the country’s three main airlines last month was 10 per cent of pre-pandemic levels four years earlier, according to aviation consultancy Cirium.
Despite Beijing abandoning its strict zero-Covid policies at the end of last year, flights in and out of mainland China are limited, airfares remain elevated and Beijing has been reluctant to grant new tourist visas to foreigners. Covid tests for travellers from China to countries around the world are still common and acting as a deterrent to flying.
While North America and Europe are expected to recover to pre-pandemic levels of travel this year, China is facing a longer timescale. “We expect international passenger numbers in China will only return to pre-Covid levels in 2025, with short-haul recovery outpacing long-haul,” said Eric Lin, head of research at UBS China.
The “Big Three” — Air China, the country’s flagship carrier, China Eastern and China Southern — have all issued profit warnings in recent weeks and were weighed down with combined record losses of more than Rmb100bn ($14.4bn) forecast for 2022.
Air China has been hit the hardest, with international flights having accounted for 31 per cent of pre-pandemic revenues. It expects to report losses of up to Rmb39.5bn for 2022.
To bolster its financial position, the carrier raised Rmb15bn through a private placement in December, with UBS and Air China’s state-owned parent China National Aviation Holding as co-investors. China Eastern Airlines also did a similar deal that month.
“Financing through the capital market is a self-rescue behaviour for these enterprises,” said Chen Wei, partner at the law firm Commerce & Finance, which advised Air China on the placement.
Private airlines have fared little better, though those focused on domestic flights showed greater resilience while China was closed to the world under zero-Covid.
Hainan Airlines, China’s largest private carrier, forecasts losses of up to Rmb22bn for last year.
Domestic travel in China is coming back faster than international long-haul. Last month, domestic flights operated by the Big Three rebounded to just below pre-pandemic levels, boosted by China’s first restriction-free lunar new year, the country’s biggest holiday, in three years.
In addition to capital offerings, Chinese airlines have looked to other ways to prop up their businesses. In January, Shandong Airlines, a regional carrier with a fleet of more than 130 planes, received help from Air China, which increased its stake in the company.
“It is more difficult for smaller or regional airlines to raise capital, so we may see more cases of mergers and acquisitions coming,” said Joanna Lu, Asia head at Cirium.
Industry experts still expect pent-up demand from Chinese travellers to cause a surge this year. The Civil Aviation Administration of China forecasts total air traffic in 2023 will reach 75 per cent of pre-pandemic levels.
Airlines will then have the challenge of ramping up capacity quickly in a difficult macroeconomic environment, according to Siddharth Narkhede, head of airline analysis at Ishka, an aviation consultancy.
“While pent-up demand means flyers might be willing to pay higher fares, to what extent and for how long will also determine Chinese airlines’ ability to manage inflationary pressures and unfavourable currency movements,” said Narkhede.
“Geopolitical issues could also limit long-haul international travel recovery, particularly to North America and possibly Europe,” he said, while adding that Chinese airlines did have one edge.
“Until the war situation in Ukraine changes, Chinese airlines have a cost and time advantage in not having to reroute flight paths to avoid Russian airspace.”