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Private carriers lead China's aviation rebound from coronavirus

Spring Airlines and China Express outrun 'big 3' state-owned rivals

A Spring Airlines jet: The Chinese budget carrier is offering flight promotions as domestic passenger counts rebound. 

HONG KONG -- China's airlines are restoring flights and regaining passengers for domestic service, defying the industry's toughest period globally since the 9/11 terror attacks, but the rebound is being led by private carriers Spring Airlines and China Express Airlines rather than the country's big three state airlines.

Spring kicked off a promotion Monday, selling air ticket coupons starting at 2,999 yuan ($429) that can be redeemed anytime this year. Buyers receive a round trip to any domestic destination, extended to cover Hong Kong, Macao and Taiwan.

The promotion, with fewer conditions than comparable offers from competitors, is part of the Shanghai-based airline's 15th anniversary, marked on Saturday. The country's first privately run budget carrier has gradually expanded its client base, battling local rivals through nimble price strategy and cost effectiveness.

"Our superiority lies in cheaper fares, while keeping the basis for safe operations," Chairman Wang Yu told a Sichuan Province publication this month. The airline reported carrying 1.52 million passengers in June, 12% higher than a year ago for the first monthly increase since December.

Spring became the only mainland airline to achieve a year-on-year recovery in domestic passengers. The latest monthly operational figures of five other listed carriers that disclose such data including the big three -- China Southern Airlines, China Eastern Airlines and Air China -- show 31% to 54% declines.

China's airlines are recovering overall. The combined net loss of all Chinese carriers and airports in June was 7.62 billion yuan, or $1.09 billion, compared with 24.6 billion yuan in February at the height of the first wave of the coronavirus pandemic, said the Civil Aviation Administration of China, the country's regulator.

International Air Transport Association figures for May show that Chinese airlines had already restored a higher share of domestic service than those of any other major market, with the passenger traffic to match. Their planes carried fuller passenger loads than those of any economy except Brazil, where few flights operated.

Investment bank Jefferies finds a further recovery, with Chinese domestic passenger capacity increasing 7.3% last week while international services still lag far behind.

"Our positive view on the Chinese airlines is due to domestic air market recovery," analyst Andrew Lee of Jefferies said.

A report from analysts led by Su Baoliang at China Merchants Securities cited three factors favoring Spring: its low-cost operation, controlled cash flow management and a powerful sales promotion strategy, as manifested in the recent campaign.

"The top low-cost carrier will be the first to come out from the haze," the analysts said Thursday. The securities firm rates Spring on its "strong buy" list with a target stock price of 47 yuan, 15% higher than its close on Monday in Shanghai.

"The unit cost of [Spring] is 32%-37% lower than that of the other three major airlines," wrote Zhang Jing, an analyst at Phillip Securities Hong Kong. "Such advantage in cost effectiveness attracts numerous self-paying passengers who are more sensitive to prices as well as business travelers pursuing high cost effectiveness."

Another player to note is China Express Airlines, a Chongqing-based private regional carrier that focuses on connecting lower-tier destinations. The Shenzhen-listed company on Wednesday forecast first-half net profit of 6.78 million yuan to 8.75 million yuan. Though this represents a decline of around 95% on the year, it would mean a sharp recovery from a net loss of 96.2 million yuan for the first quarter of 2020.

"The company will be the first to return to profit in the second quarter [in the airline sector]," said Zhang Xiaoyun, a China Industrial Securities analyst. China Express benefits from "the solid travel demands in local lines where the virus impact was relatively smaller in third- and fourth-tier cities."

China Express made headlines last month when it signed a strategic partnership agreement with Commercial Aircraft Corporation of China, or COMAC, to buy a total of 100 ARJ21 and C919 passenger aircraft for delivery starting this year. Few details have been provided on the deal, but it signals a recovery for the airline to engage in a sizable contract to boost capacity while peers delay or cancel aircraft deliveries.

China's big three airlines have yet to report first-half results, but each has signaled shareholders to expect losses. The company secretaries of China Southern and China Eastern, Xie Bing and Wang Jian, respectively, sent an identical message on their statements Friday saying the first-half performance "will be materially and adversely affected."

Smaller state-owned Shandong Airlines also warned last week of a net loss between 1.15 billion yuan and 1.41 billion yuan for the first six months, roughly doubling from its first-quarter net loss of 593 million yuan.

David Yu, a finance professor at New York University Shanghai who focuses on aviation, told the Nikkei Asian Review on Monday that smaller carriers like Spring and China Express are rebounding faster than larger peers globally. These airlines are "not as overwhelmed" by lower traffic than bigger rivals, and they are much more fuel efficient, the professor said.

As for Spring, Yu said the homegrown budget carrier "has come a long way and done a great job in penetrating the market."

Yet the success for Spring and China Express is relative. Spring's total passenger count in June remained 17% lower on the year. China Express, which does not disclose monthly operating data, acknowledged in a disclosure Wednesday that its half-year revenue had dropped due to pared-back operations.

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