Chinese airline sector:Positioning for long-haul travel

Event

    The three big Chinese airlines remain committed to expanding capacity by 9-10% pa in FY16-20, supporting our Greater China Consumer team’s view that2016 will be a strong year for leisure and travel. As detailed in A journey justbegun, this aggressive growth comes amid downward pressure on airlineyields. We expect outbound tourism to grow faster than domestic as airlinesaim for long-term growth. A common theme among the big 3 Chinese airlinesis high-growth expansion into long-haul markets, particularly North Americaand Australia, due to less competition compared to short-haul routes (NorthAsia and Asean).

    Among the big three Chinese airlines, China Eastern is most exposed torising outbound tourism as it targets the fastest international expansion in thenear term, according to SRS Analyser. On the domestic front, while theairlines have indicated muted capacity growth, mid-single-digit pax growth canbe achieved as load factors will likely rise from the current 81-82% level.

    Other beneficiaries of rising outbound travel include Ctrip, given its leadershipposition as a consolidator in China’s online travel market with over 90% share;China Int’l Travel Service, the largest integrated tourist operator in China;and Asean airlines like AirAsia, Asia Aviation and Singapore Airlines thatare tapping into China outbound tourism while benefiting from Chineseairlines’ focus on expansion into longer-haul markets such as the US andAustralia. Casino operators like The Star Entertainment and Crown Resortsare the key beneficiaries in Australia.

    Impact

    Key takeaways from our recent discussions with the big 3 Chineseairlines include: 1) despite near-term pressure on yields, airlines are targetinga 9-10% CAGR in FY16-20 capacity expansion, 2) premium seat demandremains stable, contrary to Cathay Pacific’s commentary, and 3) airlinesexpect high single-digit yield declines in the international segment due to theaggressive capacity expansion.

    Key findings from our analysis of the competitive position of the big 3Chinese airlines include: 1) muted domestic capacity growth due to capacityconstraints at key domestic airports. We believe mid-single-digit domestic paxgrowth is still achievable as there is room for load factors to rise from thecurrent 81-82% level; 2) airlines continue to focus on international capacityexpansion instead of domestic, potentially aiming for long-term growth; and3) Chinese full-service carriers (FSCs) have a competitive advantage on longhaulroutes due to less competition from both FSCs and LCCs compared toshort-haul routes (North Asia and Asean).

    International growth first, earnings later? Our general sense is that the big3 Chinese airlines have more of a top-line than a bottom-line focus for theinternational segment, as they pursue market share in the near term overmore sustainable profit growth. China’s rising middle class, which tends tohave substantial local travel experience, is starting to look overseas for adifferent travel experience. This, coupled with visa relaxations and cheaperforeign currency, expedites the need for a first-mover advantage.