Amid the coronavirus pandemic, Chinese airlines may not be profitable until international travel resumes, according to an analyst.
This remains the prediction even if China’s air passenger volume could increase by 10% year-over-year during an important holiday season that starts later this week.
“Without this international demand, it’s unlikely according to our analysis that Chinese airlines would be able to go back into profit territory,” Ivan Su, equity analyst at Morningstar, said during an interview on CNBC’s “Street Signs."
Like airlines in other parts of the world, Chinese airlines have been affected by a slowdown in travel as authorities closed borders closed and imposed restrictions to curb the spread of the virus.
Su explained that even if there has been a strong rebound of domestic travel in China as the country recovers from the outbreak, Chinese airlines will not experience growth yet.
“The overall theme for Chinese carriers is to curb losses during this period instead of making profits,” Su said. “Until we see major a pickup in yield, we don’t really think Chinese airlines will be able to generate much profits off domestic routes for long," he added.
Moreover, the analyst mentioned that he did not expect international passenger volumes into China to modestly increase this year. Locals have become traveled within their own country as international borders remain closed.
Su mentioned the 20% decline in domestic air passenger volumes in China in August from a year ago. Meanwhile, the volumes are reportedly higher in the later weeks of September as compared to a year ago.
“Heading into the Golden Week, I wouldn’t be surprised if we see a 10% increase year over year in domestic passenger volume,” said Su regarding the week-long Mid-Autumn Festival public holiday beginning on Thursday in China.
Unprofitable
Su believes that many Chinese airlines will not be able to record high profits this year partly due to the unlimited flight passes, which are prepaid tickets that allow any number of trips within a time period.
According to Su, the carriers would be earning less money on average for each trip on the passes compared to tickets purchased individually.
Chinese airlines are flying planes to cater to the domestic market and compete with one another for local travelers. However, oversupply and competition are lowering the prices, said Su. He noted the weakness in ticket prices in the last few weeks.
The strong demand for cargo may not also change the game as cargo is a small contributor to the airline operations, according to Su.
Su names China Southern Airlines as his top pick because it has always served domestic travelers and takes cargo shipments. Meanwhile, the airline is less exposed to business travel, a market that would be “permanently damaged” by the pandemic as people opt for fewer business trips.
In June, the International Air Transport Association (IATA) said that the airline industry may lose $84 billion in 2020.
“We think airlines are going to probably lose an unprecedented $84 billion in 2020,” Brian Pearce, chief economist for IATA, told CNBC.
“We’re really only just starting to see countries negotiating bilateral openings of markets. For example, the Trans-Tasma bubble between Australia and New Zealand, China and Singapore, as well as China and Korea.”
Despite the situation, Pearce believes recovery can happen in the second half of 2020.
