Industrials Author: Yangni Liu Editor: Luke Sheehan Jan 04, 2021 04:52 PM (GMT+8)

During the epidemic, massive airlines went broke worldwide, and some tourism-focused economies such as Cambodia lost a major income source. There is a well-known relationship between tourism and the aviation industry. Normally, once tourism recovers, so do airlines.

China Southern Airlines

●The Chinese aviation industry has been influenced massively by the COVID-19 crisis. However, the continuous decrease in oil prices and the recently appreciating yuan are good signs for the industry.

● The market-adjusted price and increasing population will help to expand the size of China's aviation market.

● China Southern Airlines ranked among the top companies in China by ASK, passenger load factor, RTK and RPK.

● The uncertainty of COVID-19 and the economic downturn will still be possible threats for the aviation industry in the future, which will hinder airlines' recovery.

The unexpected emergence of COVID-19 in early 2020 inflicted heavy losses on the global economy, especially for the aviation industry. Specifically, both the domestic passenger traffic volume and turnover volume dropped by about 84.5% and 83.1% from January to February 2020. Nevertheless, these ratios have been gradually rising this year, with China comprehensively controlling the outbreak.

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China's structural reform in 2002 formed a new competition pattern for the aviation industry, which was mainly based on four airlines – China Southern Airlines (ZNH:NYSE), Air China (0753:HK), China Eastern Airlines (CEA:NYSE) and Hainan Airlines (600221:SH) – which occupied over 80% of the market in 2019. As one of them, China Southern Airlines also is positioned to benefit from the industry's slow recovery post-COVID. In late 2019, it was ranked as the first among China's airlines, with its 862 aircrafts and 0.15 billion passenger traffic volume.

Aviation industry's influence factors

In general, the aviation industry is affected by four main factors – supply of aircraft components, travel demand, oil price and exchange rate. Nowadays, it is also influenced by COVID-19 and the popularization of vaccines. As the first batch of vaccine is coming, it will be a substantial repairing tool for airlines and tourism. Hence, individual demands for travel will also increase to some extent. As for the supply side, the transport capacity will be slowed down as aircraft acquisition was delayed and the capital spending was reduced.

 Fuel expense is airlines' main operating cost, affecting the unit economics largely. Taking China Southern Airlines as an example, the fuel costs occupied 32% of its total costs. To be more precise, the average oil price decreased from 2019's 4,916 CNY per ton to the first half of 2020's 3,173 per ton, and then the firm's unit cost of fuel dropped from 2019's CNY 0.12 to 2020's CNY 0.10 in the first half-year.

 Lastly, the exchange rate. The Chinese yuan appreciated from June's 7.085 CNY/USD to November's 6.607 CNY/USD. Further, except for Renminbi liabilities, most of the airlines' liabilities are from dollars. For instance, 30% of China Southern Airlines' foreign currency debts are from dollars. Hence, the appreciation of the Renminbi will further benefit the domestic aviation industry.

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Other drivers

Except for the abovementioned factors, the Chinese aviation industry's growth is also affected by state policies and demographics. First, the civil aviation administration announced its intention to adopt the market-adjusted price from 2015, which could help the airline balance its supply and demand. To be precise, airlines could utilize discounts in the off-season to increase demands and raise prices in the peak season to earn more profits. By the end of 2019, 1,328 air routes used the market-adjusted price, accounting for 30% of the total air routes.

 Furthermore, the population size will also affect passenger traffic volume, flight number per person and market size. According to the World Bank's forecast, China's population will reach 1.407 billion people in 2035. With the rising population size, China's flight number per person is expected to reach 1.2 in 2035, as it was merely 0.44 in 2018, indicating a larger room for growth. Also, the passenger traffic volume will increase to 1.69 billion people in 2035, multiplying by 2019's average price as CNY 980, the Chinese aviation industry's market size will become CNY 1.6 trillion. Thanks to this increase, airlines like China Southern Airlines will further expand their customer base and make money.

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Financial trackers

COVID-19 has negatively influenced China Southern Airlines' revenues in 2020's first three quarters. Last year, it obtained a total operating income of about CNY 154.32 billion with a net profit of CNY 2.65 billion. But its operating revenues have declined to CNY 65.35 billion in these three quarters, with merely CNY 7.46 billion in a net loss. Furthermore, most of the company's decreases were from the passenger traffic sector, which occupied 90% of the total operating income. Surprisingly, its operating incomes have shown a recovery sign recently; if COVID-19 can be controlled well domestically in the next few months, it is possible to foresee a rising trend for its operating income.

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To further elaborate on the airline's performances, the comparison of main airports, available seat kilometers (ASK), passenger load factors, revenue ton-kilometers (RTK) and revenue passenger kilometers (RPK) could not be neglected. First, China Southern Airlines accounts for around half of flight proportions in two large airports – Beijing Daxing airport and Guangzhou Baiyun airport. To be more specific, Guangzhou Baiyun airport is regarded as an international hub, whose total traveler throughputs ranked the third domestically. Moreover, even if Beijing Daxing airport is merely launched for one year, it is expected to help China Southern Airlines to expand European and American airlines, as Beijing is energetically promoting international routes in Daxing airport. 

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While for ASK, it is a good measure for passenger-carrying capacity. Shocked by COVID-19, all the airlines' ASK dropped dramatically, especially for international routes. Additionally, the passenger load factor also decreased from 2016's average of 80.8 to the first half of 2020's average of 67.26. However, from 2016 to 2020's first half-year, China Southern Airlines' data were still the highest, compared with China Eastern Airlines and Air China, indicating its strong tier-one position. Regarding RTK and RPK, they measure freight and passenger volumes carried by aircraft. Same as ASK and passenger load factor, they also showed a notable decreasing trend from the start of 2020, and China Southern Airlines performed better than the other two players from 2018 to the first half of 2020 concerning these indicators, either.

 Except for these four indicators, China Southern Airlines is putting more effort into its fleet size. With its long-term goal to become the largest airline, it aims to enlarge its amounts of aircraft to 2,000 by 2035. As a result, its fleet size has reached 857 aircraft in the first half of 2020, 17.08% and 22.43% higher than China Eastern Airlines and Air China.

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Risk trackers

Although China Southern Airlines has been recovering at a fast pace in 2020, two risk factors cannot be ignored. Firstly, the winter season can lead to a possible COVID-19 resurgence; at the same time, there are several cases of a mutant virus in the UK and other places, which might delay massive vaccination. Due to this unexpected situation, the aviation industry's passenger traffic volumes are assumed to decrease again, lowering airlines' future profits. Secondly, negative economic growth. As the International Monetary Fund forecasted, the global economy will reduce by 4.2% in 2020, plus COVID-19's shock, the economic recovery will be slower and slower. Additionally, some least developed nations will take more time to recover, further increasing the poverty gap. On the other hand, the decreasing GDP might affect global tourism to some extent, preventing China Southern Airlines' development in international routes.

Bottom line

The aviation industry and tourism recovered slightly in the third quarter of 2020, which pulled up airlines' operating incomes and passenger traffic volumes. However, the new wave of COVID-19 is likely to hit airlines again, as coronavirus vaccines are still uncertain, and travel bans across regions are here to stay. In some V-shaped scenarios for 2021, the company's advantages such as its strong fleet size can help it quickly recover, so it is expected to reach the highest growth rate in 2021.

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