CAPA Live: China's domestic aviation recovers; but not international


Each CAPA Live, held on the second Wednesday of each month, contains a summary of the latest key developments by region.

In the Apr-2021 report:

- Following months of rapid recovery in the second half of 2020, China's recovery experienced setbacks entering 2021.

- Chinese airlines expected to remain in the red in 1Q2021, due to the missed opportunity during the Lunar New Year, when citizens were strongly encouraged to stay put.

- Second wave of recovery under way as demand, load factor and airfares on upward trajectory.

- International market will remain largely closed off as vaccine rates and effectiveness remain below expectation.

  • China's domestic aviation market experienced setbacks in 2021 after a rapid recovery in the second half of 2020.
  • Chinese airlines are expected to remain in the red in the first quarter of 2021 due to missed opportunities during the Lunar New Year.
  • Domestic air passenger volume in China has recovered to 89% of 2019 levels, indicating a solid recovery since the Lunar New Year.
  • Average airfares in China have recovered to 96% of 2019 levels during recent holidays.
  • Chinese airlines are scheduled to increase domestic frequencies and seat capacity by double digits compared to 2019 during the Northern Summer season.
  • China's international aviation market is projected to remain largely closed in 2021 due to low vaccine rates and effectiveness.

China's aviation market came to an abrupt halt in Feb-2020, quickly followed by aviation in every other country in the world.

But effective control of the spread of coronavirus by China and its neighbouring countries helped their domestic markets to bounce back quickly throughout the second half of 2020.

With the exception of Japan, which declared a state of emergency twice due to worsening outbreaks of coronavirus, in China, South Korea and Taiwan the domestic traffic levels came very close to, or exceeded, 2019 levels at some stage through 2020.

Selected North Asian countries: domestic passenger year-on-year growth, Jan-2019 to Feb-2021

This momentum did not continue into 2021, however, as pockets of outbreaks of coronavirus hindered growth.

In China the government, in contrast to 2020, did not impose strict lockdowns but instead strongly encouraged its citizens to refrain from travelling to their hometowns to spend Lunar New Year with their families; Lunar New Year fell in mid Feb-2021.

The government put the onus on companies and local governments to provide employees and urban residents with financial incentives to stay put.

As a result, Feb-2021 domestic passengers dropped to approximately 50% of 2019 levels. The Lunar New Year is one of the rare opportunities for the highly competitive airline industry in China to make a profit.

China: domestic passenger numbers year-on-year growth, Jan-2019 to Feb-2021*

But because traffic declined by more than 50% during the 40-day-long holiday period, this will inevitably affect those airlines' first quarter earnings, which are due to be published at the end of Apr-2021.

At the time of this CAPA Live update, only China's 'big three' airline groups had reported their full year 2020 financial results.

All three airlines remained in the red in the second half of the year, but their operating losses narrowed quite noticeably in the second half.

'Big Three' Chinese airlines (China Southern Airlines, China Eastern Airlines and Air China): operating profit (loss), 1H2019 to 2H2020

Although Chinese airlines are also likely to remain in the red in the first quarter of 2021, there is cause for optimism for China's domestic aviation market.

In Apr-2021 air passenger volume recovered to 89% of 2019 levels

During the most recent 'Qing Ming Festival' holiday in early Apr-2021, also known as the 'Tomb Sweeping Festival', China's air passenger volume recovered to 89% of 2019 levels, continuing a solid recovery since the end of the Lunar New Year, and as a result of the pockets of coronavirus outbreaks having been brought under control.

China: daily passenger numbers and growth before and after Lunar New Year compared to 2019

Fares are also returning to previous levels

More importantly, average airfares recovered to 96% of 2019 levels during the Tomb Sweeping holiday, according to Ctrip, China's largest travel booking site.

Passenger load factor averaged 73%, which was an improvement of 8ppts compared to 2020, although still down 7ppts compared to 2019.

Furthermore, for the upcoming week-long May Day holiday in early May-2021, average economy fares are showing an increase of 11% compared to 2019 levels, further indicating that the pent-up demand that CAPA spoke about last year is catching up to domestic capacity growth.

New aircraft are being delivered

Domestic capacity growth has been aided by the delivery of new aircraft to Chinese airlines.

There were seven deliveries in Jan-2021 and 11 in Feb-2021, rising to 14 in Mar-2021.

China passenger aircraft deliveries: 1Q2019 to 1Q2021

The outlook is for more capacity growth in the coming months, rising above pre-pandemic levels.

According to OAG, China's airlines are scheduled to increase domestic frequencies and seat capacity by double digits compared to 2019 during the Northern Summer season, running from Apr-2021 to Oct-2021.

In mid Mar-2021 the Aviation regulator, the CAAC (Civil Aviation Administration of China), set a target of recovering passenger numbers to 90% of 2019 levels over the whole of 2021.

No doubt this will be mainly driven by the domestic market.

CAPA's model projects a solid uptick in capacity for 2021

Using CAPA's exclusive Air Capacity Model, CAPA expects that China's domestic seat capacity levels will remain above 2019 levels for the remainder of 2021, barring any further major outbreaks of COVID-19.

China: domestic capacity recovery as percentage of 2019 levels

Spring Airlines has prospered in 2020/21

This focus and growth in domestic capacity is most evident at Spring Airlines, China's largest LCC.

Spring added more than 60 domestic routes to its network in 2020, which resulted in its domestic passenger numbers exceeding 2019 levels every month from Jun-2020 onwards.

Even in Feb-2021, when the rest of the industry experienced more than 50% declines in domestic passengers, Spring was able to maintain 2019 volumes. Its load factor suffered, though, declining from 80% on average in 2020 to 72% in the first two months of 2021.

See related report: Spring Airlines' growth surges in China's reopened domestic market

Spring Airlines: monthly domestic passengers, Jan-2019 to Feb-2021

Regardless, the LCC's growth ambitions remains intact, with plans to add 19 new domestic routes in summer 2021. Spring expects to operate 3248 weekly domestic frequencies - almost 70% more than in 2019.

In a rare admission China's director of the Centers for Disease Control, Gao Fu, reportedly said that China's coronavirus vaccine effectiveness was low, and the government was considering a range of measures to improve the situation (although he subsequently withdrew the remarks).

A range of incentives has been offered, including vouchers for groceries in exchange for vaccinations, to try to lift the vaccine rate.

International markets likely to remain closed in 2021

China previously considered easing border restrictions if it could achieve its aim of vaccinating at least 70% of its population by the Northern Spring of 2021.

With this and an array of other factors in mind, CAPA's exclusive Air Capacity Model projects China's international market to remain largely closed in 2021.

China: international capacity recovery as percentage of 2019 levels

So, in summary, it's a fairly rosy picture for the domestic market, with rising passenger volumes, load factors and fares, but a bleak international outlook as borders remain closed and vaccine rates and effectiveness remain below expectation.

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