Will Chinese Airline Industry Continue To Fly High?

On March 27, 2017, American Airlines has bought $200 million stake in China Southern Airlines, the largest Chinese state-owned airline company. This is not the first time a U.S. airline company seeks a foothold in the Chinese airline market. Two years ago, Delta Airlines invested $450 million in China Eastern Airlines, and United Airlines has partnered with Air China, another major Chinese airline.

Why would those U.S carriers invest strategically in Chinese airline market? Let’s do some analyses below.

An Overview of Chinese Airline Industry
In recent years, the airline industry of China is developing rapidly with the rise of its economy, trade and urbanization. The consumption upgrade drives more air travel and Chinese airline companies become much more competitive globally. Therefore, the airline companies in China become more attractive for investors.

1.Prosperity Index
From 2012 to 2016, the Prosperity Index of domestic, international and HK/MO/TW (Hong Kong, Macau and Taiwan) routes indicate an uptrend of the Chinese airline industry. The international routes index shows the largest increase of 10% for four consecutive years.

Write here...

Write here...

Prosperity Index-Monthly
(Source:DataYes RoboR Research Platform)

2. Capacity Index and Price Index       
Capacity and price indexes reflect the market size and price fluctuation respectively. The following graphs show the varying trends of capacity and price in domestic, international, and HK/MO/TW routes.

Capacity Index.PNG

Capacity Index-Weekly
(Source:DataYes RoboR Research Platform

Price Index.png

Price Index-Weekly
(Source: DataYes RoboR Research Platform

Key Factors Impacting Chinese Airlines’ Income
The airline industry’s profitability is mainly impacted by three key indictors: passenger yield, oil price and CNY/USD FX rate. The following graph shows the sensitivity of each influential factor:

Sensitivity Analysis.png

2016 Net Income Sensitivity Impacted by Key Variables
(Source: Bank of America Merrill Lynch Global Research Estimates)

  • The industry’s profitability is most sensitive to CNY/USD FX rate as their expenditure and debt are USD-denominated.
  • The domestic passenger yield is more impactful compared to the international yield, as domestic traffic accounts for a majority of the business.
  • Crude oil price is also not quite impactful. As the oil price is in depressed period and the short-term fluctuation may not drastically affect the airline net profit.

Chinese Airline Industry in 20 Years
Chinese airline market is continuously growing. According to a recent research launched by IATA (International Air Transport Association), more than half of the new passengers will come from the Asia Pacific area in the coming 20 years. In approximate 2024, China may replace United States and become the biggest airline market in the world according to statistics of China’s departure/arrival and domestic capacity.

Top Passenger.png

Top Passenger Market in 20 Years
(Source: IATA Aviation 20 Years Forecast Report)