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An easing of strict Covid-control policies and travel restrictions has given a boost to China’s civil aviation sector, but uncertainties linger over profitability

By Li Mingzi , Xu Ming Updated Oct.1

A Disney-themed Airbus A330-300 owned by China Eastern Airlines takes off from Beijing Capital International Airport for Shanghai Hongqiao International Airport, July 6, 2022

On July 16, Hainan Airlines resumed a weekly direct flight from Beijing to Serbian capital Belgrade, its first inter-continental regular passenger air route from Beijing since the Covid-19 outbreak started in early 2020. Since June, major Chinese airlines and several international flight operators have restarted some direct routes to the Chinese mainland and announced newly approved international routes. International passenger flights, which have been almost totally suspended for more than two years, are showing signs of recovery.  

While international passenger aviation has been badly affected, domestic flights were also impacted by the wave of Omicron infections in China in the first half of 2022, with almost no flights out of Shanghai and other eastern and southern major cities, as well as Beijing. The fatal crash of China Eastern Airlines flight MU5735 on March 21 further repressed travel demand.  

The aviation industry lost 108.9 billion yuan (US$16.1b) in the first half of 2022, surpassing full-year losses in both 2020 and 2021, Song Zhiyong, the new head of the Civil Aviation Administration of China (CAAC) said during a teleconference on July 8. Chinese airline companies lost 91.5 billion yuan (US$13.5b) in the first half of 2022, surpassing the full-year loss of 2021, according to the airline regulator. Passenger traffic dropped sharply to 2,967 flights a day at the worst point, only 17.8 percent of the same period of 2019 when there were more than 16,500 daily flights.  

The situation improved in the run up to the summer peak tourism season, as pandemic control policies and cross-provincial travel restrictions were eased. The government rolled out support measures for the industry. In May and June, passenger traffic rose by 53.2 percent and 82.2 percent from the previous month. In June, the scale of passenger transport restored to 46.2 percent of the pre-pandemic 2019 level, the CAAC said. In April 2022, the figure was only 14.8 percent of April 2019. In the week from July 4-10, the number of passenger flights reached 71,000, a rise of 12.1 percent over the previous week and almost the same level as the same period in 2021.  

On July 1, China’s big three airlines, Air China, China Southern Airlines and China Eastern Airlines, as well as Shenzhen Airlines (a subsidiary of Air China), announced a huge combined purchase of 292 A-320 family single aisle passenger aircraft from Airbus, totaling US$37.3 billion, to increase capacity, a move interpreted as demonstrating confidence in the medium- to long-term development of civil aviation in China.  

Several securities institutions expect the strong demand in summer to last longer than in 2021, and forecast continuous improvements in airline company performance in the latter half of 2022 given the current pace of recovery. 

Stuck on the Ground 
By June, three months had passed since Luo Bin’s last flight at the end of the Lunar New Year. As captain of a private airliner, Luo has flown for 15 years and earned over 1 million yuan (US$147,900) a year before the pandemic. But in the past two years, his income shrank to 40 percent of the pre-pandemic level, as his flying hours, a major income metric, dropped to 400 hours a year, less than half of before. Captains can fly cargo planes when passenger flights are canceled, but most other crew members are rostered off, receiving a basic salary of about 3,000 yuan (US$444) a month. Many found temporary jobs or quit the profession altogether.  

In April, air passenger traffic on Air China, China Southern Airlines and China Eastern Airlines fell by 41.3 percent, 65.6 percent and 45.6 percent over the previous month, a fall of 82.3 percent, 90.3 percent and 78.2 percent over the same period of 2019, according to an analysis from Everbright Securities. The flight time of frontline crew dropped by 52 percent on average, the CAAC said.  

“Unlike the previous two years, in the first half of 2022, the pandemic resurged in several important node cities one after another, severely affecting domestic and international flights,” said Li Xiaojin, a professor at the Economic and Management College at the Civil Aviation University of China in Tianjin. Covid-19 resurged in the mega-cities of Shenzhen in February, Guangzhou and Shanghai in March and Beijing in April, bringing airports in those cities almost to a standstill. Before the pandemic, in 2019, passenger throughput of airports in Beijing, Shanghai and Guangzhou accounted for over one-fifth of the entire country’s.  

Pandemic controls stifled both aviation demand and supply, and airlines canceled many flights. Authorities discouraged cross-provincial travel and long journeys, while people did not dare travel far from home for fear of being infected or put under quarantine, or simply not being allowed to return home as they were caught in an area that had its Covid risk level upgraded to medium- or high-risk. Working from home and virtual meetings became normal substitutes for business travels.  

In China, pilots are required to have at least three takeoff and landing exercises in 90 days, either in an actual aircraft or in a simulator, easy to achieve in normal times. But after the pandemic, many pilots like Luo Bin had no flights scheduled for three or more months. Airlines need to spend more on training to keep their pilots qualified.  

At the July teleconference, the CAAC’s Song Zhiyong noted that pilots’ careers have been severely disrupted as their flight times plunged and skills slipped. China’s strict inbound quarantine policies, although now reduced from 21 days to seven in centralized facilities, also cause problems. Crew working on international routes have to undergo frequent quarantines, which puts them under great physical and mental pressure. “Their mental health requires more attention. There are safety concerns too,” said Pan Xiaoliang, who flies international routes for a State-owned airline company. He revealed that one of his colleagues had a breakdown during quarantine.  

Besides the pandemic, the domestic aviation industry faces the double pressure of high oil prices and the depreciation of the yuan. In May, the price of jet fuel reached 7,859 yuan (US$1,162) per ton, a year-on-year increase of 97 percent.  

Entering the second quarter, the yuan was devalued by about 5 percent, leading to more losses for airline companies in foreign exchange. Airline companies are sensitive to exchange rate changes which affect their overseas costs, including buying planes, aviation materials and fuel.  

Airline companies face huge costs, including parking fees, takeoff and landing charges, maintenance costs, and fixed costs in depreciation and labor, whether they fly or not. 

The asset-heavy industry is also plagued with a high rate of liabilities. Between 2014 and 2019, the debt-to-asset ratio of the big three airlines was above 50 percent. China Galaxy Securities said that because of pandemic-induced tightened cash flow, many airline companies issued super short-term commercial paper, a debt instrument, to alleviate the stress. However, this increased their liabilities and further raised the debt-to-asset ratio.  

Spring Airlines, China’s first budget airline headquartered in Shanghai, is still struggling because of the impact of the pandemic resurgence in Shanghai, one of its media officers told NewsChina. In 2021, the company earned 10.9 billion yuan (US$1.6b). But in June, even though its transport capacity and passenger turnover rose over the previous month, it still declined by 63.3 percent and 71.4 percent year-on-year, barely half of that of 2019. 

Pulling Through
Pilot Pan Xiaoliang told NewsChina that he has been working for an airline company for over 10 years. Following the Covid-19 outbreak in early 2020, he was transferred from international passenger to cargo planes. In May 2020, he started piloting international cargo flights after flying to the UK to bring back stranded Chinese nationals when international passenger flights to the Chinese mainland were largely suspended.  

In March 2020, to better control the spread of Covid from overseas, China only allowed one airline company, whether domestic or foreign, to operate one route per country, with only one flight a week at most. Many airlines continue to fly only once a week between major international and mainland cities on international routes. Almost all inbound direct international flights to Beijing were suspended, with airlines instead landing in other cities where passengers had to quarantine before being allowed to travel to the capital. This resulted in a sharp decline in international passenger flights. Cargo transportation was less affected. In order to increase the efficiency and revenue of planes, airline companies increased cargo flights and transferred passenger plane personnel to cargo flights. Some even transformed passenger planes into makeshift cargo planes.  

According to annual statistics published by the CAAC in May, the aviation industry transported 7.32 million tons of cargo in 2021, a rise of 8.2 percent year-on-year, among which the amount of freight transportation increased by 19.6 percent year-on-year.  

But the increase in cargo flights can hardly make up for losing passengers, aviation expert Li Xiaojin said. Even though the profit margin of air cargo doubled during the pandemic, its share of total revenue is low, less than 20 percent for most airlines, with passenger flights earning the bulk of income. China Eastern Airlines, for example, saw air cargo revenues rise from 3.17 percent in 2019 to 11.37 percent in the first quarter of 2021. But passenger flights still accounted for 82.01 percent of total revenue. 
In pulling through the tough times, some airlines tried other ways to explore new markets and reduce costs. Cao Zhigui, marketing director of Guangzhou-based 9 Air Company Limited, a subsidiary of Juneyao Airlines, pays close attention to the latest Covid control measures and bailout policies looking for profitable new routes. “Competition for the existing market grew fiercer because of the pandemic. Instead of joining the price wars, we put more efforts into finding new markets,” Cao told NewsChina.  

In early June, the Xinjiang Uygur Autonomous Region offered policies to stabilize economic growth, including preferential policies for tourism, which Cao regards as “very beneficial for local tourism development.” On June 10, 9 Air started its first flight from Guangzhou to Turpan. For the summer holidays, the company will operate flights to other cities in the region, including Altay, Yining and Shihezi, and increase flights to regional capital Urumqi. Since most travelers to Xinjiang are tourists, 9 Air has partnered with hotels to provide packages.  

In 2021, 9 Air launched over 20 new routes. The first budget airline in central and southern China was the only one of 35 domestic airline companies that stayed in the black in 2021, when the whole industry lost 84.3 billion yuan (US$12.5b).  

After surveying 35 airlines, CAAC concluded that even though these companies vary in scale and profit-making models, they all show high flexibility in management philosophy and mechanism, and they do better in taking precise measures to increase income and reduce costs.  

“Small and medium companies and budget airlines in smaller cities are less affected. Compared to big airlines with high debt-to-asset ratios, these companies cope with market changes more flexibly. Regional aviation enjoys subsidies from the government, which also helps them reduce costs and increase efficiency,” Li Xiaojin said.  

Airline companies in difficulty are getting creative when it comes to lifting themselves out of the doldrums, including livestream sales. In 2020, Spring Airlines started selling tickets and fuselage advertising on livestreaming platforms. In June, China Eastern Airlines offered a flight pass for unlimited travel (with conditions) in the second half of 2022 for 3,322 yuan (US$491). Chinese airlines offered similar flight passes in 2020 and 2021 to kick-start travel.  

On May 16, Hainan Airlines crew, taking advantage of Hainan’s duty-free shopping policies, sold skin care and makeup products all night, earning 1.53 million yuan (US$226,134) in a day, a record since the company started livestream sales in April. In July 2022, Hainan Airlines even offered Japanese and French language training classes and seven-day summer camps for children to learn aviation knowledge and survival skills.  

Airports, which also suffered big losses during the pandemic, are striving to find more sources of income outside aviation. In 2021, Zhunyi Airport in Guizhou Province, raised 390 million yuan (US$57.6m) through new services like putting charging points in its parking lots, machine maintenance and selling local agricultural products with their big clients.  

In May, the CAAC and the Ministry of Finance announced cash subsidies for Chinese airlines between May 21 and July 20 when average daily numbers of domestic flights per week are lower or equal to 4,500 flights. Companies whose average load factors are below 75 percent of normal and whose revenue could not cover variable costs would be covered by the policy. The maximum subsidy was set at 24,000 yuan (US$3,547) per hour.  

“It [24,000 yuan] is enough to make up the variable cost of flights [including fuel, labor and airport charges]. In other words, they won’t lose money if they don’t have a single passenger,” Li Xiaojin said. But as the aviation market gradually recovered, the subsidies grew less necessary. On June 4, flights exceeded the minimum 4,500, which led to the subsidy’s suspension between June 4-10. 

Tianshan Tianchi National Park in Xinjiang Uygur Autonomous Region in Northwest China is a hot destination for Chinese tourists this summer, July 21, 2022

Growing Momentum 
In June, as pandemic controls loosened in many places, flights recovered. In the first 10 days of June, the daily number of domestic flights was 6,100, an increase of 37 percent over the previous two months. Between June 20-26, the average number of daily flights reached 9,860, about 60.1 percent of the 2019 level. Between June 24-26, daily flights surpassed 10,000 for three days in a row.  

Passenger traffic in May and June increased by 53.2 percent and 82.2 percent. On June 29, daily passenger traffic went back to 1 million trips. Entering July, the number of daily flights kept above 10,000. On July 8 and July 10, in particular, the number of daily flights surpassed 12,000, back to 64.5 percent of the pre-pandemic level. Entering July, the average plane ticket price increased too, though still lower than the 2019 level.  

Airline companies increased capacity to prepare for the summer holidays. China Southern Airlines planned over 160,000 flights to cover popular destinations in Xinjiang, Southwest and Northwest China, and East China. Hainan Airlines plans to add 15 domestic flights, including from Beijing to Xining and from Guangzhou to Lanzhou, Gansu Province.  

International flights are slowly recovering, as travel restrictions in many countries have been canceled or loosened. On June 17, the CAAC said in a news briefing that it is negotiating with some countries about gradually and safely increasing regular international passenger flights to meet increasing travel demand. The big three Chinese airlines resumed direct flights from a few Chinese cities to London in mid-August.  

In response, major Chinese airline companies announced new plans for international flights. China Southern Airlines said it would reinstate seven international routes in June, increase international flights from 36 to 48 per week, and operate flights to 27 destination countries, up from 20. Hainan Airlines resumed its direct flight from Chongqing to Rome on June 23, the first inter-continental regular international flight to resume from the city since the pandemic breakout in 2020. On June 12, Air China restarted a weekly flight from Chengdu to Nepal’s Kathmandu. On May 30, Air China was approved to start new flights from Chongqing to Frankfurt, Taiyuan to Tokyo, while China Eastern Airlines will launch new routes from Hangzhou to Toronto, Taiyuan to Paris, Chengdu to Frankfurt and Xiamen to Auckland. The increase in flights is expected to bring down the extremely high costs of international plane tickets, particularly inbound to China.  

On June 27, China shortened the quarantine period for international travelers and close contacts of confirmed cases from 14 to seven days. In the hour following the news, the search volume for international plane tickets doubled on travel platform Qunar, the highest number of searches for two years.  

In early July, China announced that people entering China only need to undergo a mouth-swab nucleic acid test, instead of nasal and throat testing, and canceled blood antigen testing, which simplifies the procedure to enter China. These were interpreted as positive signals for the resumption of international flights in the latter half of the year.  

Analyzing the recent momentum resulting from the relaxation of health measures and travel restrictions in many countries, a quarterly report released by Airports Council International (ACI World) expects that easing travel restrictions will exert an immediate and positive impact on global air travel demand. It predicts that global passenger traffic will improve significantly to 7.1 billion trips in 2022, 77 percent of the 2019 pre-pandemic level.  

Meanwhile, the Chinese government is continuing its support for this industry. In May, the State Council released 33 measures to stabilize economic growth, including increasing emergency loans of 150 billion yuan (US$22.2b) for aviation companies and encouraging the industry to issue bonds of 200 billion yuan (US$29.6b). The CAAC official said at the July 12 briefing that the aviation regulator has secured 150 million yuan (US$22.2b) of emergency loans after securing 65.6 billion yuan (US$9.7b) of loans earlier this year. The CAAC will pour 3 billion yuan (US$443.4m) into each of Air China, China Southern Airlines and China Eastern Airlines to help them pull through. 
In the short to medium view, the hardest time for the aviation industry in China has passed under policy support, and the industry has and will continue to recover, analyzed Industrial Securities in July, seeing the recovery in overseas aviation markets as a rehearsal for what will happen in China.  

However, uncertainties remain. While optimistic overall, the ACI World assessment cited several potential risks for global aviation recovery, including geopolitical conflicts, the economic downturn and potential new Covid outbreaks. The assessment predicted global domestic passenger traffic will reach 2019 levels in late 2023 with full-year 2023 traffic on par with 2019 levels. But global international passenger traffic “will require almost one more year to recover and will reach 2019 levels only by the second half of 2024” because of recovery stagnation in the Asia-Pacific, which it expects to have the slowest recovery due to continued Covid-19 restrictions. 

Tourists try whitewater rafting, Mangshan National Forest Park, Chenzhou, Hunan Province, August 6