With the large-scale aircraft procurement of the three major aviation enterprises, the civil aviation industry is about to recover?

On the evening of July 1, China Southern Airlines Company, Air China Limited and China Eastern Airlines, the three largest airlines in China, announced that they had signed agreements with Airbus to purchase a total of 292 A320NEO series aircraft, with a total purchase amount of US $37.257 billion (about RMB 249.1 billion). The three airlines generally said that this aircraft transaction is in line with the company's 14th five-year Plan and market demand, and that based on confidence in the future development of the civil aviation industry, the company needs to plan and reserve the fleet capacity in advance, optimize the fleet structure and supplement the long-term capacity.

Since the beginning of 2020, the market demand of the air transport industry has shrunk rapidly, and the whole industry has been caught in a "cold winter". With the repeated spread of the epidemic and high international crude oil prices, the performance of the three major aviation enterprises further plummeted in the first quarter of 2022, with a total loss of more than 20 billion yuan. However, it is worth noting that the air transport market is currently undergoing a marginal improvement.Since June, with the resumption of work and production, policies involving transportation and other good for the civil aviation industry have been issued one by one, and the national level has also recently adjusted and optimized the epidemic prevention policy, taking into account scientific epidemic prevention and production and life. Some institutions said that it is expected that the air passenger transport market will gradually show a trend of recovery in 2022.

The three major aviation enterprises combined to buy nearly 300 aircraft

On the evening of July 1, China Southern Airlines Company, Air China Limited and China Eastern Airlines issued announcements one after another that they had signed aircraft ordering agreements with European Airbus. The three largest airlines in China and Air China's Shenzhen Airlines Co., Ltd. will buy a total of 292 A320neo series single-aisle aircraft from Airbus for a total of $37.257 billion (about 249.1 billion yuan).

Specifically, China Southern Airlines Company will buy 96 A320NEO series aircraft from Airbus at a basic price of about $12.248 billion (about 81.894 billion yuan). The 96 A320NEO series aircraft are scheduled to be delivered in batches from 2024 to 2027, including 30 in 2024, 40 in 2025, 19 in 2026 and 7 in 2027. It is understood that this order is the largest and largest single order in the history of China Southern Airlines.

Air China Limited will buy a total of 96 Airbus A320NEO series aircraft from Airbus (64 from our company and 32 from Shenzhen Airlines) at a total price of about $12.213 billion (about 81.66 billion yuan). In this transaction, the aforementioned aircraft to be purchased by the Company is scheduled to be delivered in batches from 2023 to 2027, and the aircraft to be purchased by Shenzhen Airlines is scheduled to be delivered in batches from 2024 to 2026.

China Eastern Airlines will buy 100 A320NEO series aircraft from Airbus at a total price of about $12.796 billion (about 85.558 billion yuan). The 100 aircraft are scheduled to be delivered to the company in batches from 2024 to 2027.

It is worth noting that the above three airlines have indicated that they will finance the purchase of aircraft through business operations, commercial bank loans or other financing methods. The transaction amount is paid by installments, which is not expected to have a significant impact on the company's cash flow and business operations.

Optimization of fleet structure and long-term capacity supplement are the main reasons.

With regard to the main reasons for the purchase of aircraft, the three airlines generally said that this aircraft transaction is in line with the company's 14th five-year Plan and market demand, and based on confidence in the future development of the civil aviation industry, the company needs to plan and reserve the fleet capacity in advance, optimize the fleet structure and supplement the long-term capacity.

China Southern Airlines Company said that the company's board of directors believes that this aircraft transaction is in line with the fleet development strategy formulated by the company's 14th five-year Plan. According to the company's comprehensive evaluation, the current is a favorable window for aircraft introduction negotiations. The company makes use of the current opportunity to strive for better aircraft purchase conditions, and this aircraft transaction will help to enhance the company's market competitiveness. The terms of this aircraft transaction are fair and reasonable and are in the interests of the company and all shareholders as a whole. Regardless of possible adjustments to the fleet based on market environment and aircraft age, based on the available tonnage kilometers (ATK) of the Company and its holding subsidiaries, the purchase of 96 A320NEO series aircraft will increase the Group's capacity by approximately 13.0%.

Air China Limited said that this transaction is in line with the company's 14th five-year Plan, development and market demand, and is conducive to the optimization of the fleet structure and long-term capacity supplement of the company and its holding subsidiaries. This transaction will expand the carrying capacity of the Group's fleet, regardless of possible adjustments to aircraft withdrawal based on market environment and aircraft age, based on the available tonnage kilometers of the Group as at 31 December 2021, this transaction will increase the Group's capacity by about 10.4%. The introduction of new aircraft will be concentrated after 2024, and in part to meet the renewal needs of the withdrawal of old aircraft from the fleet, the actual net growth rate will be maintained within a controllable range. The Group expects that this transaction will make the Group's operating costs more competitive in the market and facilitate the provision of a high standard of safe and comfortable services to passengers.

China Eastern Airlines said that based on its confidence in the future development of the civil aviation industry, the company needs to plan and reserve the fleet capacity in advance, and during the delivery of this introduction of aircraft, some of the company's stock of narrow-body aircraft will be withdrawn one after another due to older aircraft age and lease expiration and other reasons, so the company's purchase of 100 aircraft will partly play a role in replacing and updating the stock of aircraft. After the introduction of this aircraft, it will be mainly put into the domestic trunk network market, which will be used to encrypt high-yield routes and develop the potential market, and some of the follow-up aircraft will also be used to fly surrounding international routes such as Japan, South Korea and Southeast Asia. it will help the company to optimize the route network and improve the overall route income level.

Does the air transport industry usher in the opportunity of bottom layout?

Since the outbreak of the COVID-19 epidemic in early 2020, the market demand of the air transport industry has shrunk rapidly, and the whole industry has been caught in a "cold winter". For two consecutive years in 2020 and 2021, the three major aviation companies all suffered losses of more than 10 billion yuan. In 2021, Air China Limited had a net loss of 16.64 billion yuan, an increase of 15.48 percent over the previous year; China Southern Airlines Company had a net loss of 12.103 billion yuan, an increase of 11.63 percent over the previous year; and China Eastern Airlines had a net loss of 12.214 billion yuan, an increase of 3.2 percent over the previous year.

With the repeated spread of the epidemic and high international crude oil prices, the performance of the three major aviation enterprises fell further in the first quarter of 2022.The total loss exceeded 20 billion yuan. Of this total, Air China Limited lost 9 billion yuan, down 43.37 percent from the same period last year; China Southern Airlines Company lost 4.496 billion yuan, down 12.23 percent from the same period last year; and China Eastern Airlines lost 7.76 billion yuan, down 103.94 percent from the same period last year.

However, it is worth noting that the air transport market is currently undergoing a marginal improvement.Since June, with the resumption of work and production, policies involving transportation and other good for the civil aviation industry have been issued one by one, and the national level has also recently adjusted and optimized the epidemic prevention policy, taking into account scientific epidemic prevention and production and life. On June 29, according to the website of the Ministry of Industry and Information Technology, in order to resolutely implement the general strategy of the CPC Central Committee and the State Council on "external defense input, internal anti-rebound" and the general policy of "dynamic zero clearance", and to support the efficient overall planning of epidemic prevention and control and economic and social development, to facilitate the travel of the majority of users, the "asterisk" mark of the communication itinerary card has been cancelled from now on.

According to recent information from the Civil Aviation Administration, from June 24 to 26, the number of daily civil aviation flights across the country exceeded 10000 for three consecutive days, reaching 10609, 10083 and 10198 respectively, and the daily passenger traffic volume reached 896000, 830000 and 851000 respectively.The recovery of the air transport market continues to improve.In this regard, the person in charge of the relevant departments and bureaus of the Civil Aviation Administration said that affected by the epidemic, the number of civil aviation flights has continued to decline since March this year. Since May, with the landing of several rounds of civil aviation relief policies and the overall improvement of the national epidemic prevention and control situation, civil aviation production and operation has gradually resumed. According to reports, since June, the recovery rate of civil aviation transport production has accelerated, the number of daily flights has increased from 6489 at the beginning of the month to a maximum of 10609, and the daily passenger traffic has increased from 445000 at the beginning of the month to a maximum of 896000. Especially in the most recent week (June 20-26), the average daily flight volume reached 9860, and the average daily passenger transport volume reached 804000. The recovery of the air transport market is obvious, and market confidence has been further boosted.

The latest research report of Galaxy Securities said that up to now, due to the global impact of O'Micron has been alleviated, COVID-19 specific drugs have made phased new progress, and the air passenger transport market is expected to gradually show a trend of recovery in 2022. First, the travel sector in 2021 is still one of the industries most affected by the epidemic. The passenger volume of civil aviation and high-speed rail reached 67% and 71% of that before the epidemic (2019). In particular, international air passenger transport was only 2% of 2019, and the average occupancy rate of the three major airlines was 62%, much lower than 82% before the epidemic. Second, COVID-19 's new progress in specific drugs continues to strengthen the expectation of border opening around the world, and the travel plate is likely to usher in a trend of recovery from 2022. Recently, Thailand, Britain, the Philippines, Australia, and New Zealand have announced the opening of their borders and new progress has been made in superimposing COVID-19 's special medicine. at the same time, the 2022 Beijing Winter Olympic Games will be held as scheduled, with more experience in epidemic prevention and control. China's international routes are expected to resume gradually. Third, the resumption process of China's international routes is uncertain. At present, the passenger volume of China's international routes is only 2% of that before the epidemic, which basically forms a bottom, but the progress of recovery should take into account the overall recovery of the global epidemic and the adjustment of China's epidemic prevention strategy. an optimistic scenario assumes that it will take at least two years before the international line resumes the epidemic. Fourth, short-term attention to the international line recovery expected to enhance the aviation industry system opportunities, long-term attention to the segment of the aviation travel market leader.

As a cyclical industry, the relationship between supply and demand is the leading factor in the performance of the aviation industry. Guojin Securities analysis said:"it is relatively certain that the transport capacity of the Aviation Division will slow down in the next two years. As demand picks up, the growth rate of demand will be significantly higher than that of supply. With the release of the market-oriented effect of superimposed fares, the performance of the Aviation Division will rebound substantially."