China's aviation sector is expected to see profitability from the second quarter of 2023 as passenger volumes continue to recover despite the general weakness seen in the global air cargo industry.
HSBC Global Research said in a report that 2023 started off with "narrower losses" and easing cost pressures with the Big 3 Chinese airlines — China Eastern Airline (CEA), Air China, and China Southern Airlines (CSA) — reporting a collective Q1 loss totalling RMB8.6 billion (US$1.24 billion) on Chinese GAAP, narrowing significantly from an RMB21 billion (US$3.04 billion) loss in Q1 2022 or RMB35 billion (US$5.06 billion) loss in the fourth quarter of 2022.
The HSBC report noted that CEA reported the highest loss (RMB3.8 billion), followed by Air China (RMB2.9 billion) and CSA (RMB1.9 billion).
It added that the Big 3 reported revenue growth of 73% y-o-y vs RPK growth of only 86%.
"Given the increase in domestic fares, we think the slower revenue growth was likely due to much weaker cargo and international yields," HSBC Global Research said in a statement.
"However, operating expenses grew only 31%, implying significant operating leverage from the traffic recovery and largely fixed costs. We also note that the average jet fuel price declined 5% y-o-y or 10% q-o-q in 1Q23," it added.
Meanwhile, the report pointed to "solid visibility on robust travel demand" during the Labour Day holidays — bookings for online travel agents (OTAs) including Trip.com, Fliggy and Qunar have surpassed 2019's levels — "unanimously suggesting a booming travel season for the upcoming Labour Day holidays (April 29 to May 3)."
"Driven by robust demand, domestic airfares have also increased to above 2019 levels," the report added.
It noted that Flight Master reported on April 23 that average domestic economy class ticket prices since March for the Labour Day holidays were up 53% vs 2019 while VariFlight saw average domestic airfares improve 39% vs 2019.
"However, we caution that the pickup in international travel will be slower, as the capacity ramp-up is constrained by bilateral negotiations on air rights between China and other countries, visa policy, and limited ground handling ability in foreign airports," it said.
Profitability as early as Q2
"We model for Big 3 airlines to turn profitable in 2023 on improving load factors: We keep our 2023 profit estimates largely unchanged."
"We continue to expect load factors and yields to improve on domestic routes on the continued pent-up demand and the tightening of capacity due to the redeployment of aircraft to international routes. This could swing the Big 3 airlines into profitability as early as 2Q23 and see them remain profitable overall for FY23e."
The HSBC report said its combined 2023 profit forecast of RMB13.4 billion for the Big 3 is 4.7x above consensus.
"We see upside risk for domestic yields: We expect air pax traffic (RPK) for the Big 3 airlines to recover to 104% of the 2019 level in 2023e for domestic and 40% for international and 115% and 81% for 2024e, respectively," it added.
"We model for the domestic pax yield to rise by 7% y-o-y in 2023 but remain 5% above the 2019 level."
HSBC said with the gap between the capacity ramp-up and traffic narrowing, the recovery in domestic yields could "potentially surprise."
