In the year 2024, China's civil aviation industry remains a burgeoning sector. To make informed investment decisions, it is crucial to understand the business logic and competitive environment within each sub-industry. If one can identify undervalued or even low valuations, making the right investment choices becomes less challenging.
When investing in an industry, we must consider two aspects: the overall development prospects of the industry and the business logic and competitive environment of its various sub-industries. Let's examine the long-term investment opportunities in China's civil aviation industry from these two perspectives.
China's Civil Aviation Industry Still Has Significant Room for Growth
Firstly, looking at the industry as a whole, after complex global comparisons, we can roughly conclude that China's civil aviation industry in 2024 is still in its infancy and has considerable room for growth in the future.
Comparing the global development levels of the civil aviation industry is an extremely complex task. Due to the differences in population, land area, land composition (archipelagos or continents, elongated or compact territories), population distribution, and the level of development of alternative transportation methods such as railways and highways in each country, it is nearly impossible to find a completely comparable country to simply contrast with China's civil aviation industry to determine its long-term development potential. In contrast, analyzing indicators such as per capita electricity consumption and per capita meat consumption in various countries is relatively straightforward.
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Therefore, it is undoubtedly difficult to simply use international comparisons to determine how much room for development China's civil aviation industry still has. From China's characteristics, factors that favor the civil aviation industry include: a vast land area, a relatively dispersed population composition (more than 90% of the population lives east of the Hu Huanyong line, and the area where this part of the population is distributed also accounts for about 43% of the national area, over 4 million square kilometers, even larger than India), and rapidly developing economic levels. The main factors that are not conducive to the civil aviation industry include a highly developed railway system, especially high-speed rail networks, and a high degree of dependence on foreign oil (which is also one of the important reasons why China is striving to develop its railway system).
However, even if precise comparisons cannot be made, rough comparisons can still give us an understanding of the potential development space of China's civil aviation industry. According to data from the International Civil Aviation Organization (ICAO), the World Bank, and various national statistical offices, we can understand the current development situation of China's civil aviation industry and compare it with some of the world's major economies.
The main civil aviation development data consists of two indicators: revenue ton-kilometers (including passengers, cargo, and mail) and revenue passenger-kilometers. "Revenue ton-kilometers" refers to the flight kilometers multiplied by the chargeable payload (passengers and cargo) tonnage, while "revenue passenger-kilometers" refers to the flight kilometers multiplied by the chargeable number of passengers.
At present, both domestic and international civil aviation industries primarily generate revenue from passenger transport. According to a report by the International Air Transport Association (IATA) in 2023, it was predicted that global air passenger revenue for that year would be $546 billion, approximately 90% of the 2019 level; cargo revenue was about $140 billion, 40% higher than in 2019. According to the semi-annual report of China National Aviation Group in 2024, the total operating income of Air China during the period was 79.5 billion yuan, of which air passenger revenue reached 73.1 billion yuan.
It can be seen that the main source of revenue in the aviation industry is passenger transport. The following analysis will focus on the passenger transport indicators in the industry. At the same time, due to the distortion of data in the years following 2020 due to the COVID-19 pandemic, the civil aviation industry data for various countries is based on the 2019 indicators, while other data not too affected by the pandemic uses the 2023 indicators.Data indicates that the average revenue passenger kilometers in China's civil aviation industry is 835 kilometers per person, significantly lower than Japan's 1623 kilometers, South Korea's 3664 kilometers, the United States' 5081 kilometers, Germany's 3012 kilometers, Russia's 1898 kilometers, and so on.
However, the gap between China's civil aviation industry and other economies is primarily reflected in international flights. The average revenue passenger kilometers for China's civil aviation industry is only 227 kilometers, while Japan has 835 kilometers, South Korea has 3421 kilometers, Malaysia has 2631 kilometers, and even Mexico has 411 kilometers.
At the same time, the average revenue passenger kilometers for domestic routes in China is not significantly different from other countries.
Faced with this set of data, many analyses have concluded that the development of China's domestic civil aviation market has become saturated, with only international routes offering significant market space. However, this conclusion may be incorrect.
The reason is that China's land area and the dispersion of people's residences are much higher than those of most economies around the world. Although China has a developed high-speed rail network, high-speed trains still struggle to compete with civil aviation on routes longer than 3 to 5 hours. In 2024, the high-speed train from Beijing to Guangzhou takes 12 hours, and from Shanghai to Chengdu, it takes 12 to 13 hours. Therefore, high-speed trains cannot completely replace civil aviation in the domestic market. In 2024, the fastest high-speed train between Beijing and Shanghai takes only 4 hours and 18 minutes, but there is still a significant market demand for the Beijing-Shanghai air express, which is a good example.
Taking the United Kingdom as an example, the average revenue passenger kilometers for domestic routes is only 136 kilometers, less than a quarter of China's 608 kilometers. This is not because the UK is less developed than China, but because its land area is too small, so there is little need to fly domestically (the main civil aviation demand comes from flights between Northern Ireland and the British Isles).
Therefore, when comparing the development of domestic flights, simply dividing revenue passenger kilometers by the total population overlooks the impact of land area size. If we study the development space of China's domestic civil aviation market, we should mainly compare China with countries that have a relatively developed economy and large land area.
However, statistical data show that there are only two countries with a large land area and a much higher level of economic development than China, the United States and Canada, with their domestic flight average revenue passenger kilometers at 3624 kilometers and 1591 kilometers, respectively, both significantly higher than China's. Considering China's highly developed railway passenger network compared to the United States and Canada, China's domestic civil aviation industry still has room for development, but it is also difficult to reach the levels of these two countries.
Comparing with Russia, its domestic flight average revenue passenger kilometers reach 1018 kilometers, 67% higher than China's. Although Russia does not have a high-speed rail network as developed as China's, its population is more concentrated than China's. Therefore, taking into account all factors, it can still be seen that China's domestic civil aviation industry still has a lot of development space.
The development trend of the civil aviation industry is positive.Although there is still room for growth, what is the development trend of China's civil aviation industry from the perspective of 2024? Looking at the data, the development trend of China's civil aviation industry remains quite good. Let's examine three sets of data.
First, let's look at the development speed of the civil aviation industry's infrastructure, namely airports. According to data from the Civil Aviation Administration of China, the number of general transport airports on the Chinese mainland has continued to grow steadily over the years. In 2010, there were only 175 general transport airports nationwide (excluding Hong Kong, Macao, and Taiwan regions), 210 in 2015, 238 in 2019, and by 2023, this number had grown to 259.
According to the "14th Five-Year Plan" for Civil Aviation Development released in 2022, it is expected that by 2025, the number of civil transport airports in China will exceed 270.
Looking at the actual transportation volume of the civil aviation industry, its recovery trend from the pandemic is also very clear. According to data from the Civil Aviation Administration, the passenger turnover of civil aviation in 2023 has reached 1.0309 trillion passenger-kilometers, which is 88% of the 1.1705 trillion passenger-kilometers in 2019, surpassing the 951.3 billion passenger-kilometers in 2017. With the market recovery in 2024, it is expected that the passenger turnover of civil aviation will further increase.
In terms of international passenger travel, which was most severely affected by the pandemic, according to data from the National Immigration Administration, the number of entries and exits in the first half of 2024 has reached 287 million person-times. Simply doubling this figure gives 574 million person-times, which is 86% of the 2019 figure and essentially equal to the 590 million person-times in 2017. Moreover, the recovery in travel in the second half of 2024 is significantly better than in the first half, so it is estimated that the annual figure will be more than this.
It can be seen that although the pandemic has brought a significant impact on China's civil aviation industry, with the gradual weakening of the pandemic's influence and China's increasing openness to the outside world, the complete recovery and long-term development of the civil aviation industry are highly probable events. Considering the long-term development potential of China's civil aviation industry compared to other global economies, the long-term development of China's civil aviation industry is very much worth looking forward to.
Business Logic and Competitive Environment of Six Sub-industries
After understanding the overall trend of the development of the civil aviation industry, we need to specifically understand the specific business logic and competitive environment of each sub-industry. On this basis, if we can find valuations that are cost-effective or even low, it will not be difficult to make the right investment decisions.
Combining the current situation of listed companies, there are at least six sub-industries in the civil aviation industry: civil aviation companies, airports, information companies, aircraft leasing companies, civil aircraft manufacturing, and air logistics companies.In the global market, competition among civil aviation companies is often very fierce. This often leads to higher debt-to-asset ratios for civil aviation companies, subjecting them to the torments of volatile oil prices and fluctuating interest rates.
It can be said that civil aviation companies are in a tough business. However, in the Chinese market, the situation is somewhat better. The total business volume of the three major airlines in the Chinese civil aviation market accounts for about 65% of the entire market, so the competition is relatively more moderate.
Apart from the three major airlines, some small airlines have done better in terms of cost-effectiveness, thus winning their own survival space. However, the pandemic has hit these companies more fiercely. At the same time, large airlines have also begun to take some head-on competition against these small airlines' high cost-effectiveness products, which is not good news for the latter.
In terms of business characteristics, airports are a pretty good business. Unless two airports are too close (such as some airports in the Pearl River Delta), airports often have a monopoly advantage in the local area. At the same time, the huge demand for land, as well as the impact of noise generated by the routes of entering and leaving the port on the surrounding area, also makes it very difficult to build new airports, and existing airports are easy to gain competitive advantages.
However, China's development is, after all, very rapid. Therefore, in the mature market, airports that can maintain absolute regional monopoly may also be challenged by the construction of new airports in some cities in China or the relocation of airports. When investing, it is necessary to pay attention to factors such as whether there are new airports built near the airport leading to diversion, and whether there are plans for the relocation of existing airports.
In terms of civil aircraft manufacturing, at present, the main manufacturers of large civil aircraft (carrying more than 100 people) globally are Boeing and Airbus. In this oligopolistic market, the Commercial Aircraft Corporation of China (COMAC), with the C919 aircraft that has been developed, the slightly smaller ARJ21 aircraft, and the C929 aircraft that are being developed, will inevitably bring considerable profits once it can successfully enter the market.
However, COMAC has not yet gone public. Before that, paying attention to some small companies in the civil aircraft manufacturing industry chain may provide some opportunities for picking up bargains.
For Chinese civil aircraft manufacturing, some skeptical voices come from whether it can maintain a sufficient safety record. Looking at the long-term good safety record maintained in the Northeast Asia region, engineers and pilots in Northeast Asia (including China) have proven that they can provide one of the safest aviation services in the world.
In the civil aviation industry, companies providing aviation information services are a special niche existence. These companies charge fees to customers by providing integrated aviation information services. Generally speaking, since aviation information services are relatively exclusive and have network advantages, these information service companies often operate more easily and do not need to take on debt to cope with competition, so the debt-to-asset ratio will not be too high.
However, due to its business pricing belonging to a more unique niche market, how the pricing is determined and whether there will be changes is also a key point that investors need to pay attention to.Due to the heavy capital investment in the aviation industry, airlines often cannot afford, nor do they need to afford, all the capital investment in aircraft on their own. Instead, they opt to lease aircraft. For instance, according to the semi-annual report of China National Aviation Corporation for 2024, the company's fleet consists of 915 aircraft, of which only 407 are owned, while 508 are leased, including 212 financed leases and 296 operating leases.
For aircraft leasing companies, their business is somewhat akin to banks in the civil aviation sector. Since the borrowing entities are civil aviation companies, and Chinese civil aviation companies are often large in scale (led by the three major airlines), even if smaller airlines go bankrupt, they have aircraft assets as collateral. Therefore, aircraft leasing companies often enjoy a more comfortable existence.
However, there are two noteworthy issues for aircraft leasing companies. First, competition among these companies is extremely fierce; a slightly higher or lower interest rate can be enough to cause them to lose or win in the competition. Second, like banks and other financial enterprises, these companies often have high leverage ratios. If the management and business teams fail in their duties, the company may suffer significant losses under the influence of high leverage. Therefore, choosing reliable major shareholders and a trustworthy management team becomes particularly important.
Compared to general logistics companies, air logistics companies are more high-end, have higher requirements for timeliness, and require greater capital investment and entry barriers. This leads to a relatively more relaxed competitive environment for air logistics companies compared to general logistics companies.
However, air logistics companies are still part of the logistics industry, and intense competition is the nature of the logistics industry. Consumers are selective among the services provided by different logistics companies, with little customer loyalty to speak of. They go where the cost-performance ratio is high, and each company is constantly trying to provide products that are lower in price and higher in quality.
Therefore, air logistics is essentially still an industry filled with intense competition, and the companies within it also bear significant operational pressures. Fortunately, due to its higher entry barriers, the competition remains relatively controllable.