15-Apr-2020 4:51 PM

COVID-19 recovery: Hainan Airlines’ recovery falters

Analysis

China's domestic airline market is starting to recover.

But Hainan Airlines' domestic recovery has been choppy and the struggling carrier is only producing around 40% of the domestic seats compared to the same time last year - well below levels of its 'big three' Chinese rival carriers. Hainan Airlines is filing slower, more cautious resumptions of near term domestic flying and is the most pessimistic of the four largest airlines in terms of capacity deployment plans for the May Labor Day holiday period onwards.

Its parent, the HNA group has been confronting well publicised liquidity issues and on 29-Feb-2020 announced that the group's liquidity will be managed by a working committee comprising representatives from the Hainan Provincial Government, CAAC and China Development Bank as the coronavirus outbreak deters travel and impact the group's debt workout plan.

The weakened carrier recently held a conference with bondholders of its CNY750 million (USD106.4 million) bond, due on 17-Apr-2020, saying it is unable to repay the short term notes. It added it hopes to extend the repayment, noting that revenue had declined significantly due to the coronavirus pandemic.

For the formerly ambitious carrier, 2020 is proving to be an extreme challenge.

Summary

Hainan Airlines is experiencing a slower recovery in domestic seat capacity compared to its major Chinese rivals.
The airline is cautious in its capacity planning and has the most pessimistic deployment plans for the May Labor Day holiday period onwards.
Hainan Airlines has seen a significant drop in international seat capacity, with a 96% decrease, and this is expected to be the "new normal" for at least the next month.
The airline's inactive fleet is currently the highest among China's four major airlines, with over 60% of its fleet grounded.
Hainan Airlines is heavily reliant on the domestic market as its international network is virtually shut down until early May.
The number of new COVID-19 cases in China has slowed down since early March, reflecting aggressive containment measures.

Summary

Domestic: Hainan Airlines has experienced a choppy domestic 'recovery' and is the most cautious near term (April) of the four largest Chinese airlines in terms of capacity planning and the most pessimistic in terms of capacity deployment plans for the May Labor Day holiday period onwards.
International: Hainan Airlines more than halved its expectations for international seat capacity production, compared to schedule plans filed just a fortnight ago. COVID-19 cases have jumped with returning Chinese workers and students, resulting in new restrictions that will dramatically pare back the international networks of Chinese airlines and foreign carriers to China. Hainan Airlines' 96% drop in international capacity is the 'new normal' for at least the next month (Apr-2020).

In this new CAPA series, 'Airline Future Plans', reviews the forward capacity/schedule plans and fleet utilisation trends of key airlines that have shown some early signs of recovery, at least in their domestic markets. Privately owned Hainan Airlines, the fourth largest airline in China, joins coverage on Air China, China Eastern Airlines and China Southern Airlines in this new series, which aims to provide insights into the fast-changing airline strategy.

Report sources: CAPA Fleet Database. OAG
Insights are drawn from the latest weekly flight schedules filed with OAG with aircraft configuration data applied from the CAPA Fleet Database, to produce the Schedule Analysis tools. https://centreforaviation.com/data/fleet

For other airlines in this series please see:

COVID-19 recovery: Air China files May holiday sched at 2019 levels

COVID-19 Recovery: China Eastern Airlines regains lost ground

COVID-19 recovery: China Southern Airlines' intensive recovery effort

Hainan Airlines' slower recovery than the three majors in domestic seat capacity

Like its main rivals, Hainan Airlines' domestic airline capacity levels bottomed out in mid-February, according to CAPA Membership Schedule Analysis data, but the struggling carrier has not replaced capacity as readily as its competitors.

Hainan Airlines weekly total domestic seat capacity (mil)

Source: CAPA - Centre for Aviation and OAG * These values are at least partly predictive up to 6 months from 13-Apr-2020 and may be subject to change. Details on terms used within this graph can be found in the glossary. Caution should be taken when looking further ahead than 2-3 weeks as schedules are adjusted on a week by week basis. A certain percentage of this capacity will be used for cargo, although the exact amount is unknown. It is estimated that around 15-20% of scheduled flights are being cancelled.

The graph above plots the forward capacity based on consecutive weekly changes in forward filings of schedules with OAG.

This provides a rare insight into airline planning, with massive weekly changes reflecting the highly volatile environment airlines are working in. The purple dotted line shows Hainan's plans from three weeks ago, the orange line was from two weeks ago, the blue is last week's expectation, and the green line is showing this week's plan.

From a high at the end of Jan-2020 of just under 3.5 million seats, Hainan Airlines' domestic production plummeted

Hainan Airlines' domestic seat volume collapsed to a low of just 95,000 seats for the w/c 17-Feb-2020, until the CAAC stepped in and mandated, with measures of support, flying operations.
The following week saw an increase before a bigger reapplication of capacity, back up to 307,000 seats for the w/c 02-Mar-20. The following week saw a drop back to 244,000 seats and then another rise to a new high of 402,000 seats w/c 23-Mar-20.
Filings for w/c 23-Mar-2020 originally forecast a continuation of this increase in seats, to around 714,000 per week and then stabilisation for most of Apr-2020. However, subsequent schedules filed for w/c 30-Mar-2020 and then through 06-Apr-2020 show a continuing decrease down to 297,000. A small kick is then forecast for the end of Apr-2020 with a rise to 438,000 for w/c 27-Apr-2020 but then a big drop back down to 179,000 from the beginning of May-2020.
Schedules filed from May-2020 onwards are showing a continuation of this low of around 179,000 seats.

International seat capacity near zero, and staying there

Hainan Airlines more than halved its expectations for international seat capacity production, compared to plans filed just a fortnight ago. COVID-19 cases have jumped with returning Chinese workers and students, resulting in new restrictions that will dramatically pare back the international networks of Chinese airlines and foreign carriers to China.

Hainan Airlines' 96% drop in international capacity is the 'new normal' for at least the next month (Apr-2020).

Hainan Airlines weekly total international seat capacity (mil); plans for significant increases

Source: CAPA - Centre for Aviation and OAG * These values are at least partly predictive up to 6 months from 16-Mar-2020 and may be subject to change. Details on terms used within this graph can be found in the glossary. Caution should be taken when looking further ahead than 2-3 weeks as schedules are adjusted on a week by week basis. A certain percentage of this capacity will be used for cargo, although the exact amount is unknown. It is estimated that around 15-20% of scheduled flights are being cancelled.

Hainan Airlines international key points:

Hainan Airlines' international seat capacity dropped -96% in early Feb-2020, bottoming out during w/c 17-Feb-2020 at 4,000 seats per week from a high of just over 100,000 seats.
Schedule filings for the w/c 16-Mar-2020 predicted an optimistic rise back up to around 80,000 seats - and remaining there through April and May, but those hopes have faded.
The latest available schedule filings w/c 13-Apr-2020 now show a drop back to a new low of between 580 and 1100 seats until 27-Apr-20 when a small increase to 8,500 is forecast, rising to a new plateau of 38,000 seats from 04-May-2020, a -68% drop year-on-year. This level is then forecast to remain until the end of Jun-2020 before it is forecast to rise up to 81,000 seats from Jul-2020, which is 51% below 2019 levels.

Hainan Airlines, via its official Weibo account, announced in late March that its international network from 29-Mar-2020 until 02-May-2020 would comprise of just two routes, served once per week, as follows:

Beijing Capital-Toronto;
Beijing Capital-Brussels.

The carrier is therefore virtually wholly reliant on the domestic market to see it through the coming few months.

Hainan Airlines' inactive fleet swells

Hainan Airlines' inactive fleet is currently the highest among China's four major airlines at above 60%. More widebody aircraft have been grounded, reflecting the virtual shut-down of its international network till early May-2020.

Hainan Airlines' inactive fleet (% of total): Jan-Mar 2020

Hainan Airlines' current fleet, as at 13 April 2020

Hainan Airlines fleet orders and deliveries: 2020-2025

Appendix 1. Who is Hainan Airlines?

As with the other Chinese airline groups, Hainan Airlines has a complex web, sometimes interlocking, of subsidiaries and partial ownerships, as outlined below. For most purposes, unlike the big three, its ownership and directive controls are independent of government.

Its main owners are Hainan Airlines Group and HNA Technology Group, which between them control almost 80%. Grand China Air and George Soros' American Aviation LDC hold another 24.6%. The Soros group at one time held 25% of the airline, on the back of a USD25 million investment, in the latter years of the 20th century at a time when Hainan Airlines was a fledgling.

Its intimate relationship with the Hainan government and the government's tourism goals was highlighted when on 10-Mar-2020 the airline committed to launch more than 40 international services by 2022, in support of Hainan Province's goal to open 100 international services and attract two million inbound tourists in the next three to five years.

Appendix 2. China's COVID-19 curve flattening

The number of new cases in China has dramatically slowed since early March, reflecting aggressive containment measures in the outbreak epicentre, Wuhan/Hubei Province and across the nation.

COVID-19 Cases (cumulative) Global vs China cumulative cases

A broad correlation between COVID-19 cases and seat capacity decline

The rise in Chinese numbers of COVID-19 cases broadly correlates with the decline in airline seat capacity globally.

Plotting the number of daily COVID-19 deaths and reversing the axis so that an increase is shown as a downward movement, and showing also the year-on-year decline in weekly airline seats, the following chart illustrates this relationship.

COVID-19 deaths in China (inverted axis) versus year-on-year decline in weekly China domestic airline seats