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China's carriers poised for biggest profit

CHINA'S "big three", Air China Ltd., China Eastern Airlines Corp. and China Southern Airlines Co., have spent hundreds of billions of dollars on new aircraft in the past decade that have helped the state-owned airlines expand in a market where some 488 million people - or the combined populations of the US, Germany and the UK - take to the skies every year.

The three airlines have been increasingly ferrying passengers from the mainland to Europe and the US without hopping over in Hong Kong or Singapore, Bloomberg reported.

"Chinese travellers prefer to fly with Chinese airlines and hence, as the Chinese travel more, their airlines benefit," said Steve Saxon, a Shanghai-based partner at McKinsey & Co. "Beijing, Shanghai and Guangzhou are all becoming powerful hubs as well, being able to draw traffic from China to Europe and US, increasingly competing with Tokyo, Seoul and Hong Kong."

A market that grew almost 11 per cent last year - three times the clip in the US - means China's carriers are in a sweet spot their premium rivals in the region can only envy. Demand for seats has by and large kept pace with capacity addition.

Among rivals bearing the brunt of that expansion is Cathay Pacific Airways Ltd., the marquee airline that owns about 18 per cent of flag carrier Air China. The Hong Kong carrier just embarked on a three-year corporate transformation programme, which entails job cuts and management changes, after reporting its first loss in eight years.

Newer destinations out of China include Las Vegas, Brisbane, San Jose and Adelaide as the three airlines take advantage of their state-ownership to corner a majority of the air rights apportioned by regulators. Though local rivals such as Hainan Airlines Co., controlled by billionaire Chen Feng's HNA Group, are trying to secure a footing, the top three together command 80 per cent of the international market.

Hainan, whose capacity expansion has been the most aggressive among the Chinese operators, reported recently that its profit in 2016 rose 4.5 per cent to CNY3.14 billion (US$456 million), while sales jumped almost 16 per cent.

"If you manage to get more people on the aircraft, then it will definitely help with your earnings," said Geoffrey Cheng, a Hong Kong-based analyst at Bocom International Holdings Co. "These carriers reported better load factor last year."

The expansion is a worthy investment as demand for outbound travel remains strong, said Mr Saxon at McKinsey. China has been the world's largest source of outbound tourists, with over 120 million Chinese venturing abroad in 2016.

Global operators have been wanting a share of the pie as well. American Airlines Group Inc., the world's largest carrier, agreed to invest $200 million in China Southern recently in a deal that involves code sharing. The pact follows a similar accord in 2015, when Delta Air Lines Inc. announced a $450 million investment in China Eastern.