(ATF) Consumer demand for flights has recovered, but China’s smaller private airlines are running out of working capital. Local governments have stepped in to “bargain hunt” for new owners and turned these airlines into local sweethearts. Several have been nationalised – Ruili Airlines, Hongtu Airlines and Qingdao Airlines – but the industry could still see a new wave of mergers and acquisitions.
As China’s economy continues its rebound from Covid-19 recessions, air travel has also recovered to near pre-Covid-19 levels. Data from the Civil Aviation Administration of China (CAAC) show that passenger transportation volume was 47.9 million people in September, which was 87.5% of the level from a year before.
The domestic recovery has been faster than for international flights - with intra-China travel at 98% of the pre-Covid-19 level.
The first half was an unparalleled worldwide disaster for the airline industry and Chinese airlines recorded losses of 74.1 billion yuan (US$11 billion) in the first six months of 2020. However, China’s state-owned airlines and larger private airlines such as Spring and Juneyao have remained resilient.
However, smaller private airlines have been struggling.
In a bid to boost sales, three small private airlines – OK, Qingdao and Ruili Airlines – joined together in July to launch an unlimited weekend package called “Enjoy a Holiday Every Week”. It was an unprecedented cross-airline promotional campaign.
'Bargain' for local governments
In China’s tourism-driven Yunnan, two private airlines have sold stakes to local governments outside of the southwestern province as their business had been hit badly. The timing was good for the local governments as the market is highly regulated and obtaining a new license is usually very difficult.
In August this year, Wuxi Communications Industry Group, wholly-owned by Wuxi government in Jiangsu Province, announced it would acquire a stake in Ruili Airlines from Yunnan Jingcheng Group Co Ltd, which is a private company. Ruili owns 20 Boeing aircraft, and operates 66 domestic routes and 10 international routes to destinations such as Cambodia, Thailand, Vietnam and Myanmar.
The acquisition fills a gap for Jiangsu to have its own local airline and is expected to help Wuxi become a hub in the province. Jiangsu's previous attempts to acquire Hongtu Airlines (also known as Air Travel), China Eastern’s Jiangsu branch and Suparna Airlines had all collapsed.
Meanwhile, Hongtu Airlines fell into the hands of another local government. According to Chinese business credit reporting platform Tianyancha, an emerging industry-focused investment fund run by the Hunan government paid 435 million yuan ($64.6 million) for a 26% stake in Yunnan’s Hongtu, making it the first local airline in Hunan province.
Hongtu was founded in 2014 by several entrepreneurs in the freight forwarding and ticketing business and later acquired by Tongcheng Tourism (LY.com). Its business was already struggling before Covid-19. After Hunan’s acquisition, Tongcheng will remain Hongtu’s controlling shareholder with a 51% stake.
Hongtu recently changed its business name to “Hunan Airlines Shareholding Co Ltd.” Just last week, it announced it would add five new domestic routes starting in the 2020-2021 winter/spring season and increase its total number of domestic routes to 21. The airline operates 12 Airbus A320 aircraft.
Yunnan, which borders Vietnam, Laos and Myanmar, is a destination favoured by tourists because of its natural scenery and rich local culture. The provincial capital and air hub Kunming is frequented by tourists as the region’s mountainous landscape makes air travel the best arrival option.
Kunming’s airline market was crowded with seven airlines based there. Besides Ruili and Hongtu, there was also the national airlines China Eastern, China Southern and Sichuan Airlines, as well as the local Lucky Air and Kunming Airlines.
But Hongtu has moved its base from Kunming to Hunan province’s capital Changsha, while Ruili now has bases in both Kunming and Wuxi.
Another case of a private airline being nationalised occurred in Qingdao in the northeast before the city reported new Covid-19 cases, and decided to test all of its 9 million residents, then started cancelling flights.
Qingdao becomes state-owned
Qingdao City Construction Investment (Group) acquired Qingdao Airlines last month along with some other aviation assets from Nanshan Holdings for 6.85 billion yuan ($1 billion). Qingdao Airlines was established in June 2013, and now operates 26 aircraft with about 70 domestic routes and 20 or so international routes. It will become 100% state-owned after the acquisition.
Qingdao Airlines said it will take this restructuring as an opportunity to clarify its operational directions and optimize its management mechanism. It will aim for an IPO.
Meanwhile, Heilongjiang province’s only local airline, Longjiang Airline, was not so lucky to find a government-backed suitor.
Last month, a 98% stake in Longjiang Airlines was sold to Beijing-based private consulting firm Beijing Shengda Jinye Investment Consulting for 810 million yuan ($120 million).
First-ever airline auction
Starting from a bid price of 329 million yuan ($49 million), two bidders placed 91 bids in China’s first-ever auction of an airline business.
Founded in 2014 by a local jeweler, Longjiang Airlines has only five aircraft and total debts of 822 million yuan ($122 million).
CITIC Securities noted in a commentary: “The air transport industry has heavy assets, high leverage and is highly cyclical. Its ability to resist economic downturn risks has been weak. Historically, China's airline industry restructuring has been dominated by the Big Three state-owned airlines, with local state-owned entities participating to some extent.
“At present, airlines with a less-than-30 aircraft fleet account for 55% of the total, and there is still room for concentration in the industry,” the security brokerage said, commenting on the nationalisation of Ruili and Hongtu.
Other analysts expect an air service supply shortage in China as demand continues to rise while airline capacity remains low. But it may take some time for supply to grow as airlines have deferred their fleet expansion plans and the industry is going through restructuring.
“As we see it, airline businesses recovery from the bottom will not be a short momentum. Demand recovery combined with supply shrinkage will result in a gradual recovery curve,” N-Securities said.
Demand recovery is mainly happening in the domestic market, and airlines that operate a majority of domestic routes will benefit, they said.
Industrial Securities expects another period of relaxation to begin soon as the industry becomes more concentrated. The losses of airlines in 2020 are likely to be larger than those in 2008, it said, due to higher impact to their cash flows and more small airlines going out of business.
“Looking forward, the pandemic will eventually go away and China’s domestic airline industry will surely recover...Small and medium-sized airlines with high performance and resilience are expected to thrive,” they said.
Several rounds of restructuring
China’s airline industry has gone through several rounds of restructuring since the market-oriented reform in 1987 that broke CAAC’s monopoly into six state-owned airlines.
In 2002, the Big Three – Air China, China Eastern, and China Southern – were formed through restructuring of the six state-owned airlines. Private airlines also started to boom.
Hit by the financial crisis in 2008, China's airlines experienced another round of restructuring between 2009 to 2013. The government bailed out the loss-incurring Big Three, and orchestrated the merger of China Eastern and Shanghai Airlines. Private airlines were not as lucky; many were acquired by the state-owned airlines.
In 2013, the market opened up again with new private airlines flourishing. Nearly 20 private airlines came into the market between 2011 and 2015. Their inexpensive tickets helped to stimulate consumer demand dramatically.
But over the past five years, regulations have tightened again because of security concerns.