China Eastern Airlines

China’s airlines held back by declining yields despite dominant positions

Average passenger yields, a key measure of profitability, are constrained by fierce competition and overcrowded domestic routes, says Fitch

PUBLISHED : Tuesday, 13 June, 2017, 7:32am
UPDATED : Tuesday, 13 June, 2017, 7:32am

The average passenger yields of Chinese airlines are declining, according to Fitch Ratings, because of fierce competition and a high concentration of carriers on popular routes.

Passenger yield, the money earned from flying a passenger for one kilometre, is a key measure of profitability.

Yields on domestic routes fell by an average of 12 per cent among China’s six biggest airlines between 2014 and 2016, while yields on international routes took even more of a hit, dropping by an average of 18 per cent.

Competition is especially intense among airlines operating overlapping routes between tier 1 and 2 cities
Karl Shen, Fitch Ratings

“Competition is especially intense among airlines operating overlapping routes between tier 1 and 2 cities,” said Karl Shen, associate director of corporate ratings at Fitch.

China’s top 20 domestic air routes had an average of 7.2 airlines in operation between November 2013 and April 2014, against only 4.2 in the US , according to the Civil Aviation Administration of China.

“Online travel agencies’ aggressive airfare discounting and a higher share of airline-direct sales have also exacerbated downward pricing pressure,” Shen added.

The potential risk aviation companies were facing from the yuan’s depreciation has been easing recently. The big three – Air China, China Southern and China Eastern – had about 44 per cent of their debt denominated in US dollars at the end of 2016, compared with 69 per cent in 2015 and 83 per cent in 2014.

“This suggests Chinese airlines have reduced their exposure to US dollar-denominated debt because sustained depreciation in the Chinese yuan against the US dollar could dampen Chinese airlines’ profitability and increase financial leverage,” said Shen.

Another source of relief for the big three airlines is that they enjoy significant operational advantages on domestic routes thanks to their dominant positions and strong government support. The four biggest airlines – the big three plus Hainan Airlines – jointly represented 77 per cent of domestic market share by revenue passenger kilometre (RPK) last year.

“The creditworthiness of China’s big three airlines is closely linked to China’s performance due to their dominant market positions in the civil aviation sector,” said Shen. “Room for private airlines to compete against the big three is limited.”

Fitch expects Chinese airlines’ total RPK growth to be in the high single digit over the next five to ten years, supported by the urbanisation and air-transport infrastructure expansion.

“Capacity bottlenecks in domestic civil airspace and airport infrastructure have led to overcrowded domestic airline routes and poor on-time flight rates,” Shen added. “These capacity constraints are likely to hamper RPK growth on domestic routes over the near to medium-term as consumer demand continues to outstrip infrastructure build, but should be partially offset by stronger growth on international routes.”