The Chinese aviation industry has grown at an impressive rate in recent years. Driven by the abolition of the minimum fare and high economic growth, the number of passengers has skyrocketed. These factors have created an opportunity for new players to enter the market. With depressed air travel in most markets in Europe and North America due to the pandemic, Chinese air traffic is currently the highest in the world.
Over the years, the airline industry in China has remained dominated by all three national airlines. However, low-cost companies have grown at a rapid rate since the early 2000s.
A general vision
Almost 660 million passengers flew in China in 2019, twice more than in 2012. This impressive growth trajectory has been driven by international travel, which has more than doubled since 2015, growing by 14% in 2018 alone. However , most of the traffic is still national. Almost 90% of all traffic takes place within the country.
Some companies have decided to take advantage of the rapidly developing market and have created new airlines. As a result, despite double-digit market growth, competition has intensified in China. Capacity has increased even faster than demand, reducing returns and profitability. The big three carriers, Air China, China Eastern, and China Southern, have lagged behind agile and newly created LCCs.
Foreign airlines flying to China have also not benefited from this market dynamic. Not only have they lost market share to their Chinese competitors, but they also face reduced profitability. Clearly, the post-pandemic market remains depressed, however, airline dynamics and the competitive landscape prevail.
The big three
All three state carriers have strongly dominated the industry, both domestically and internationally. All three have had a similar financial performance and offer almost the same number of seats on international routes with a maximum difference of two million seats per year.
In 2010, its accumulated domestic seating capacity was almost 60%, while international seats exceeded 80%. China Southern only had a quarter of the total market and was the world’s largest airline by seat availability last year.
But a lot has changed in the last decade. The big three lost almost 20% of national and international to their smallest rivals. In addition, its profit margins remained contracted despite the booming market, averaging about 5-7% in recent years. The new competitive landscape begins to weigh on its business models.
Low rising costs
In 2015, only twelve Chinese airlines offered international flights. Now there are 29. The number of airlines that operate international long-distance flights grew 300% in just five years and is currently twelve. This explosion of new airlines has been fueled mainly by new airlines starting hubs in smaller Chinese cities, as well as the emergence of the low-cost model in China.
A decade ago, low-cost airlines had approximately 1% of the total market share, and now they represent 15%. In the past four years, fourteen new airlines have spent their operations in the international market, many of which operate on a low-cost model. In particular, low-cost Spring Airlines has become the fourth largest airline by international capacity in China.
It now offers 6 million international seats a year, almost 700% more than in 2012. It has a fleet of almost 100 aircraft, and one of the highest low-cost net income margins in Asia of almost 16%.
Looking to the future
In total, the next few years will be critical to the market, with several operators looking to come out as strong as they can after the pandemic. However, once the industry recovers, it could be an exciting time for Chinese operations.
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