China’s state-owned airlines, including the ‘Big Three’ of Air China, China Eastern and China Southern, have long been important symbols of the country’s aviation industry. However, they have faced growing challenges in recent years due to COVID-19 disruptions, a weaker yuan, and intense competition. Despite significant government support and capital injections, mainland airlines saw record losses in the first half of 2022, raising questions about their future prospects. This article examines the pressures facing China’s airline industry and the implications for state investors.
The Big Three airlines reported staggering losses in 2022
The financial results of Air China, China Eastern and China Southern in the first half of 2022 highlight the extreme difficulties facing the industry. The three airlines posted a combined loss of over $7 billion, the largest in their history. China Eastern suffered a $4 billion deficit due to COVID lockdowns in Shanghai and weaker travel demand. Air China lost $3 billion as frequent lockdowns weighed on the aviation market. China Southern’s $1.3 billion loss was attributed to COVID curbs, fare discounts and foreign exchange losses. The huge losses show how disruptive China’s strict pandemic controls have been for its airline industry.
Government capital injections have prevented more serious turmoil
While the losses are staggering, the situation could have been much worse without government support. In 2020 and 2021, China’s central government provided over $10 billion in capital to its airline industry through investments, equity purchases and subsidies. The lifeline prevented the pandemic from triggering a full-blown crisis or insolvency. The government has maintained its commitment, injecting $8.9 billion into Air China in June 2022. Further capital infusions cannot be ruled out if conditions deteriorate. However, there are signs that the state’s appetite for airline bailouts is diminishing.
A weaker yuan has amplified cost pressures
Chinese airlines typically have high levels of U.S. dollar-denominated debt related to aircraft purchases from Boeing and Airbus. The yuan’s sharp depreciation against the dollar in 2022 has amplified interest repayment costs. Meanwhile, fuel, aircraft leasing, and spare parts imports have also become more expensive. However, the airlines’ revenue remains largely in yuan terms, creating major foreign exchange headwinds. The government stepped in last year to provide forex hedging tools, but macro conditions remain challenging.
Intensifying competition has hurt pricing power
While China’s aviation market has huge long-term potential, it remains intensely competitive. The Big Three face growing competition from China’s high-speed rail network, budget carriers like Spring Airlines, and younger airlines like Juneyao Air. The competitive landscape has eroded their pricing power and put downward pressure on fares. Air passenger traffic rebounded in mid-2022 as COVID disruptions eased temporarily. However, the airlines resorted to substantial fare discounts to fill seats, weighing on revenue and margins.
China’s major state-owned airlines faced record losses in 2022 as COVID disruptions amplified cost pressures and competitive factors. While government support provides short-term relief, resolving the deep-rooted challenges will require post-pandemic market reforms.