China's three largest state-owned airlines are rapidly expanding their routes and capacity to Europe, as their ability to fly over Russian airspace gives them a cost advantage over their regional rivals.
Western airlines reduced their direct flights to… ChinaWith Scandinavian Airlines, Lufthansa, British Airways and Virgin Atlantic all suspending some flights to the mainland in 2024, due to cost pressures from avoiding Russia.
Moscow banned most European airlines from entering Russian airspace in 2022 in response to Western sanctions imposed in the wake of President Vladimir Putin's sweeping invasion of Ukraine, adding hours to flights to Asian destinations including China and raising fuel bills.
Chinese AirlinesThe airline, which was not affected by the Russian airspace ban, has been quick to plug the gap, increasing capacity and offering cheaper tickets despite persistent reporting of losses.
“European airlines are not competitive,” said David Yu, an aviation industry expert at New York University in Shanghai.
Passenger seat capacity, measured in available seat kilometers, between China and Western Europe by China's three main intercontinental airlines – Air China, China Eastern and China Southern – was 18 percent higher in October than in the same month in 2019, according to DBS Equity Research Analyst Jason Sum.
The three airlines' scheduled flights to the UK, Spain and Italy rose sharply, according to aviation consultancy Ishka, rising between 25 percent and 45 percent in the first nine months of 2024 compared to 2019.
They are also able to offer more competitive prices due to the cost advantage of flying over Russia. The Big Three's ticket prices are about 5 to 35 percent cheaper than those of European airlines for direct round-trip flights between China and Western Europe, according to UBS analyst Eric Lin.
European airlines have complained that Chinese carriers have an unfair advantage and a stranglehold on routes between the two regions.
American airlines successfully lobbied the US government for this Keep the lid tight On the number of direct flights back and forth to China to stop further invasions from major Chinese airlines.
European airlines are “in a very unequal competitive situation with China,” Lufthansa said in a statement, saying the airlines benefit from lower costs and increased government support, as well as the ability to fly over Russia.
“The fact that Lufthansa must now remove one of its oldest routes, Frankfurt-Beijing, from its flight schedule shows the extent of the shift in the balance of international competition,” the airline said.
Western industry executives privately question the level of demand for China Airlines flights, which some say could lead to a loss. Analysts say a political motive is also at work as Beijing expands its visa exemption plans to bring back tourists.
“The economy is declining in China, tourism is not (fully) back yet, and business is still recovering,” said one Chinese aviation industry executive. “You need to increase connectivity in order to increase the flow of people into China.”
But while some Western airlines cited weak demand for flights outside China, UBS said international passenger demand for major Chinese airlines was close to pre-pandemic levels.
Major Chinese airlines have also enhanced their direct flights to the Middle East in recent months amid an expansion in trade activity between the largest economy in Asia and the Gulf region, in addition to deepening economic relations. Especially between China and Saudi Arabia.
Scheduled flights in the first nine months of 2024 for the big three airlines to Saudi Arabia jumped more than seven-fold compared to the same period in 2019, according to Ishka, while flights to the UAE rose by 40 percent.
The Big Three airlines are important to the government in Beijing because aviation is “seen as a critical driver towards continued economic growth,” Ishka analysts said, adding that the airlines were helped by route subsidies and that state ownership meant they had significant credit facilities available. . .
Beijing-based Air China, Shanghai-based China Eastern, and Guangzhou-based China Southern came into existence in the 1980s when the state airline monopoly was broken up and the industry underwent consolidation. All three are dual-listed in Hong Kong and in mainland China.
While Chinese airlines benefit from their cost advantage over their European rivals, the country's mixed economic recovery from the Covid-19 pandemic means they are still losing money overall.
In stark contrast to the buoyant profits reported by major airlines in Europe and other Asian countries in 2023, China's big three airlines posted combined losses of RMB13.3 billion ($1.8 billion). HSBC and DBS believe Air China and China Eastern could post losses again in 2024.
Analysts said major Chinese airlines have taken a particular hit from slowing consumption in China as well as increasing competition from low-cost carriers on domestic routes. Flight prices departing from Chinese airports in 2024 fell more than 20 percent from 2023 for domestic and international flights, according to aviation data provider ForwardKeys.
The outlook for major Chinese airlines for 2025 “remains bleak,” according to DBS’s Sum, who said domestic competition will continue to exert “strong pressure” on earnings per passenger, while the economic slowdown in China is likely to weigh on demand for premium travel.
A weak recovery in flights to the key North American airline market will also add to profitability pressures, according to UBS's Lin. While Canada in October lifted restrictions on flights to China, flights in early November between China and the United States only reached about 30 per cent of 2019 levels, compared to more than 90 per cent for flights between China and Europe, according to the bank. UPS.
Additional reporting by Haoxiang Kuo in Hong Kong
