中国廉价航空：十年繁荣的开始

1、Why read this reportWe explain why we think Chinas low-cost carriers (LCCs) are in a sweet spot; demand is set to boom as mass tourism increases and airfares become increasinglyaffordableThe outlook for the supply side is improving, too; the easing of aviation regulations, airport growth, and fleet

2、expansion will power growth in capacityWe initiate coverage on three Chinese LCCs, and we explainwhy we prefer Spring Airlines(Buy)Its not just the vast addressable market, the size of the country, the increase in disposable income, and the easing of aviation regulations that are so appealing. What

3、we really like is the stage the low-cost carrier (LCC) industry has reached in China.The US and Europe provide good pointers for how the LCC industry can develop in China. These markets tell us that LCCs start to prosper when flying loses the luxury cachet associated with the wealthy and business tr

4、avel. Demand booms when mass tourism increases and airfares become increasingly affordable. The two key indicators to watch are GDP per capita and the price of air fares as a percentage of average disposable income. Based on these metrics, we believe Chinas LCCs are in a sweet spot. We think they ca

5、n triple their share of the countrys aviation market in the next decade.The outlook for the supply side, a problem in the past, is also improving. Key factors include the easing of aviation regulations, more airport capacity, which will create new flight slots, and the mass production of a domestic

6、aircraft.We initiate coverage on Spring Airlines (Buy), Juneyao Airlines (Buy) and China Express Airlines (Buy). Their business models vary but they should all benefit from what we see as being a golden decade for the LCC industry inChina.Contents HYPERLINK l _bookmark0 Why readthisreport1 HYPERLINK

7、 l _bookmark2 Facts andfigures4 HYPERLINK l _bookmark3 Relatedresearch5 HYPERLINK l _bookmark4 A goodflight plan6 HYPERLINK l _bookmark5 The start of agoldendecade17 HYPERLINK l _bookmark6 The supply sideisimproving23 HYPERLINK l _bookmark7 Companysection29 HYPERLINK l _bookmark8 Spring Airlines (60

8、1021CH)30 HYPERLINK l _bookmark9 Juneyao Airlines(603885CH)45 HYPERLINK l _bookmark10 China Express Airlines HYPERLINK l _bookmark10 (002928CH)60 HYPERLINK l _bookmark11 Disclosureappendix78 HYPERLINK l _bookmark1 Disclaimer83The rise of Chinas low-cost carrier (LCC) airlinesWe believe the growing p

9、opularity of mass travel and increasingly affordable flight tickets will drive the demand for LCCs, while easing pressure on the supply side will boost transport capacity. We initiate coverage on Spring Airlines, Juneyao Airlines and China Express Airlines1.2%0.8%0.4%019601990The cost of airfares as

10、 a% of income has dropped below 1%5bnair trips were made inChina in 2017In 2017Chinas LCCs flewpassengersBy 2027we expect Chinas LCCs to carry385mpassengersBUYSpring Airlines601021 CHPassenger traffic of domesticLCCs will grow at a CAGR of%over 2018-27Juneyao Airlines603885 CH BUY11.3% share of Chin

11、asaviation marketBUYChina ExpressAirlines 002928 CHand increase their aviation market share to 35%Easing pressures on the supply side are positive for Chinas LCCsRevised flight slots, time allocation system reform, and a quantitative scoring systemMass production of the C919 expected to begin in 202

12、1, boosting capacity growthOver the next five years, a number of cities will build new hub airports or expand existing facilitiesSource: Bureau of Economic Analysis, HSBC Qianhai SecuritiesFacts and figuresmillionLCC passenger traffic in China in 201711.3%LCC market share in China in 2017We believe

13、the market share of LCCs in China will reach 35% in 2027e20% CAGRWe believe the market share of LCCs in China will reach 35% in 2027eThe growth in LCC passenger traffic in China over 2018-27eInt USD 18,000The turning point for growth in LCC demand in China, based on per capita GDP(PPP, constant 2011

14、)2004-07The first major growth spurt in China air In 2018, the average LCC fare in China dropped to 1.2% of per capita disposable income1%In 2018, the average LCC fare in China dropped to 1.2% of per capita disposable income2010-12The second major growth spurt in China air travelAverage US domestic

15、airfare, in terms of the proportion of per capita disposable income (1960-80)25%The percentage of routes on which air fares have been deregulated2pptsThe expected increase in the CAGR of Spring Airlines flight numbers over 2019-23e after the new construction and expansion of airportsRelated research

16、Recommended readingChinese Airlines: Ready for 19 January2019HKandChinaAirlines:Boeing737Maxgrounded:analysetheimpact,19March 2019Europeanlowcostairlines:fallsfast,demandfaster,2April2019EuropeanLCCs:timesareachanging,27September2018Indian halts as fares hurt 11 March2019A good flight planIts an exc

17、ellent time to be a low-cost carrier (LCC) in China. We think the industry is in a sweet spot as growth in mass tourism and increasingly affordable ticket prices drive demand. The supply side, a problem in the past, is improving, too. We expect LCC passenger traffic to rise at a CAGR of 20% over 201

18、8-27e, with the market share rising to 35%. We initiate coverage on Spring Airlines (Buy), Juneyao Airlines (Buy) and China Express Airlines (Buy), and we prefer Spring Airlines.We think LCCs can fly much higherChinas aviation industry started late but is catching up quickly. According to the Civil

19、Aviation Administration of China (CAAC), Chinas airlines flew a total of 610m passengers in 2018, up 10.6% y-o-y, and second only to the 1.01bn passengers in the US. Low-cost carriers (LCCs) only appeared in the market in 2004. By 2017 they were carrying 62.24m passengers, accounting for 11.3% of Ch

20、inas aviation market and pulling in revenues of RMB35.48bn.However, we think LCCs can fly much higher. We expect their passenger traffic to grow at a CAGR of 20% over 2018-27e, with the market share rising to 35% and revenue hitting RMB219.4bn in 2027e. By then, we think LCCs will carry 385m passeng

21、ers a year.Its not just the vast addressable market, the size of the country, the increase in disposable income, and the easing of aviation regulations that are so appealing. What we really like is the stage the industry has reached.The US and Europe provide good pointers for how the low cost carrie

22、r industry can develop in China. These markets tell us that LCCs start to prosper when flying loses the luxury cachet associated with the wealthy and business travel. The two key indicators to watch are GDP per capita and the price of air fares as a percentage of average disposable income. Based on

23、these metrics, we believe China is in a sweet spot. This reports looks at:How industry demand is ready to surge, ushering in a golden decade ofgrowthWhy pressure on the supply side is easing. Key factors are the easing of aviation regulations,moreairportcapacitywillreducecongestion,andmassproduction

24、ofadomestic aircraft will boostcapacity.The prospects for the three LCCs on which we initiate coverage Spring Airlines (Buy), Juneyao Airlines (Buy) and China Express Airlines (Buy). We explain why we prefer Spring Airlines.Exhibit 1. Comps tableCompanyTickerLCY(29 ADTVUSDmMarket PE (x) _ PB (x) ROE

25、(%) CapUSDbn 2019e 2020e 2021e 2019e 2020e 2021e 2019e 2020e 2021eEPS CAGR (%) 2019-21eDivyieldComparison for LCCsLCCs in ChinaSpringAirlines*601021 CHRMB43.326.45.718.916.62.0151517291JuneyaoAirlines*603885 CHRMB12.51.61.4141114191Average17.115.91.7151316241American aviation companiesSouthwestAirli

26、nesLUV USUSD49.6156.426.924242391JetBlueAirwaysJBLUUSUSD1.00.80.7111212610SpiritAirlinesSAVE USUSD46.81.10.9181615430AllegiantAirlinesALGTUSUSD143.020.22.310.810.01.9282723142European aviation companiesRyanair HoldingsRYA LNEUR10.412.410.0211819160EasyJet AirlineEZJ LNEUR1.01.00.911111285Other Asian

27、 aviation companiesIndigo AirlinesINDIGO ININR164176.49.0NA27.06.2-33847120AirAsia Group BhdAAGB MKMYR11.41.21.21088-196Air ArabiaAIRARABI UHAED1.00.80.8111111NA8Global average11.52.11.8151819192Comparison for regional airlinesRegional airlines in ChinaChina Express Airlines* 002928CHRMB11.46.01.012

28、.913.02.0231920212Regional airlines in the USSkyWestSKYWUSUSD15141141Note: Priced at close of 29 May 2019. NA Not applicable. Source: Bloomberg, HSBC Qianhai Securities estimates (*Stocks we cover in the report)Exhibit 2. Upside potential in terms of the number of air trips per capita in ChinaExhibi

29、t 3. China is the worlds second largest aviation market (in terms of passenger traffic)32.521.510.50ChinaUnited StatesUnited KingdomGermany Global0.40.57500.40.550025001970 1977 1984 1991 1998 2005 2012United States(million trip) China(million trip)United States YOY China YOY80%60%40%20%0%-20%Source

30、:CAAC,NationalBureauofStatistics,WorldBank,HSBC QianhaiSecuritiesSource:CAAC,NationalBureauofStatistics,WorldBank,HSBCQianhaiSecuritiesA business model emphasising cost reduction and efficiencyCompared to full-service carriers, LCCs reduce their costs and improve operational efficiency by either sim

31、plifying or not offering services (e.g., baggage drop-off, in-flight meals and in-flight entertainment). The LCC business model was started in the 1970s by the American domestic carrier, Southwest Airlines (LUV US, Not Rated), now the largest of its kind. The model was soon adopted in other markets

32、and LCCs now have a market share of between 30% and 40% inthe US, Europe and Asia Pacific. Chinas LCCs include Spring Airlines, Juneyao Airlines, ChinaUnited Airlines, West Air, Capital Airlines and Chengdu Airlines.Exhibit 4. 2017 market share of LCCs by continentExhibit 5. Market share of LCCs in

33、ChinaAsiaNorth Pacific Europe LatinAmericaMiddle EastAfrica13%42%35%22%27%32%13%42%35%22%27%32%8.5%2.9%2007201220178.5%2.9%Full-serviceCarriersLost-costCarriersOthersSource: Airbus, HSBCQianhaiSecuritiesSource: CAAC, Wind, HSBC QianhaiSecuritiesOperational differences between LCCs and full-service c

34、arriers include:Single aircraft type: this cuts purchase costs and makes maintenance cheaper andeasier.High passenger load factor (PLF) and aircraft utilisation rate: to amortise fixed costs by increasing carrying capacity and aircraft daily flightslots.Low ticket prices and selling expenses: high r

35、atio of direct sales; building self-managed sales channels to reduce agency fees; attracting consumers with lower ticket prices. Due to longer average flight distances, LCCs in China have lowered fares based on the scale effect.Point-to-point flight route: focus on major airports, different from the

36、 hub-and-spoke route network of full-service airlines.Low staff-aircraft ratio: strict control over the number of non-frontline employees; emphasis on staff efficiency improvement and economies ofscale.High proportion of ancillary revenue: tap potential demand from consumers, expand fee- based servi

37、ces other than passenger and freight to improveprofitability.High profitability: by squeezing costs, enhancing efficiency and strengthening management, top-performing LCCs often achieve higher profit margins than traditional carriers.Exhibit 6. Aircraft utilisation rate comparison of LCCs and full-s

38、ervice carriers in China (hours/day)Full-service CarriersLow-costCarriersFull-service CarriersLow-costCarriersExhibit 7. Aircraft utilisation rate comparison of LCCs and full-service carriers in the US (hours/day)Low-cost CarriersFull-serviceCarriers14Low-cost CarriersFull-serviceCarriers12121010886

39、Spring AirlinesAir China SouthernAirlineEastern Airlines6United AirlinesJet Blue AirlinesSpirit Airlines20152016201520162017Source: Wind, HSBCQianhaiSecuritiesSource: Bloomberg, HSBC QianhaiSecuritiesExhibit 8. PLF comparison of low-cost and full-service carriers in ChinaLow-cost CarriersFull-servic

40、e Carriers100%Low-cost CarriersFull-service CarriersExhibit 9. PLF comparison of low-cost and full-service carriers in the USFull-service CarriersLow-cost Carriers86%Full-service CarriersLow-cost Carriers84%82%80%70%SpringAirlinesAir China SouthernAirlineAirlines78%American AirlinesDelta AirlinesUni

41、ted AirlinesSouthwest AirlinesJet Blue Airlines201520162017201520162017Source: Wind, HSBCQianhaiSecuritiesSource: Bloomberg, HSBC QianhaiSecuritiesExhibit 10. Average flight length for domestic market of low-cost and full- service carriers in China (km)Full-service CarriersLow-cost Carriers1800Full-

42、service CarriersLow-cost Carriers1600Exhibit 11. Average flight length of low- cost and full-service carriers in US (miles)Low-costCarriersFull-serviceCarriersLow-costCarriersFull-serviceCarriers140014001200120010001000800800Spring AirlinesJuneyao AirlinesAir China SouthernAirlinesEastern Airlines60

43、0AmericanAirlinesUnitedSouthwestAirlinesJetBlueAirlines201520162017201520162017Source: Wind, HSBCQianhaiSecuritiesSource: Bloomberg, HSBC QianhaiSecuritiesExhibit 12. Yield per RPK for domestic market of low-cost and full-service carriers in China (RMB)Full-service CarriersLow-cost CarriersFull-serv

44、ice CarriersLow-cost Carriers0Exhibit 13. Yield per RPM of low-cost and full-service carriers in the US (USD cent)Full-service CarriersLow-cost Carriers17Full-service CarriersLow-cost Carriers1615141312AirlinesAir China SouthernAirlinesAirlinesAmericanAirlinesDeltaAirlinesUnitedAirlinesJetBlueAirlin

45、es201520162017201520162017Source: Wind, HSBCQianhaiSecuritiesSource: Bloomberg, HSBC QianhaiSecuritiesExhibit 14. Ancillary revenue proportion of low-cost and full-service carriers in ChinaFull-serviceCarriersLow-costCarriersFull-serviceCarriersLow-costCarriers8%Exhibit 15. Ancillary revenue proport

46、ion of low-cost and full-service carriers in the USLow-costCarriersFull-serviceCarriersLow-costCarriersFull-serviceCarriers40%6%4%2%0%Spring AirlinesAirChinaAirlinesEastern AirlinesAmericanAirlinesUnitedAirlinesSpiritAirlines20152016201520162017Source: Wind, HSBCQianhaiSecuritiesSource: Bloomberg, I

47、deaWorks, HSBC QianhaiSecuritiesExhibit 16. Net margins of low-cost and full-service carriers in ChinaLow-cost CarriersFull-service Carriers20%Low-cost CarriersFull-service Carriers16%Exhibit 17. Net margins of low-cost and full-service carriers in the USLow-cost CarriersFull-serviceCarriersLow-cost

48、 CarriersFull-serviceCarriers16%12%12%8%8%4%4%0%Spring AirlinesAir China SouthernAirlineEastern Airlines0%American AirlinesDelta AirlinesUnited AirlinesSouthwest AirlinesJet Blue Airlines20152016201520162017Source: Wind, HSBCQianhaiSecuritiesSource: Bloomberg, HSBC QianhaiSecuritiesIndustry outlookO

49、ver the last decade, airline passenger traffic in China has risen from 5.42m in 2007 to 62.24m in 2017, a CAGR of 27.6%. Inevitably, as the industry continuing to expand, the pace of growth is starting to slow down. It has eased to 14-18% since 2014, according to the CAAC estimates.Its a different s

50、tory for LCCs. In Q4 2018 and January-February 2019, passenger traffic grew 12.3% and 16.2%, respectively, well ahead of the 8.7% and 13% for the overall aviation industry, respectively. During the same periods, the passenger load factor of Spring Airlines, the market leader, was 88% and 92%, respec

51、tively, while Juneyao Airlines passenger load factor was steady at 85%. The average passenger load factor for the industry was lower at 82% and 84%, respectively, during the same periods. We estimate the growth of LCC passenger traffic will be 14.4%, 17.4% and 15.7% in 2019-21e, respectively.Another

52、 big plus is that Chinas home-grown domestic aircraft, the C919, is expected to go into mass production in 2021, which will reduce the reliance on Airbus and Boeing and increase capacity, in our view.We estimate the passenger traffic of LCCs will rise at a CAGR of 20% over 2018-27e and reach 385m in

53、 2027e. This would represent a market share of 35%, up from 11.3% in 2017. We estimate that the revenue of Chinas LCCs grew to cRMB35.48bn in 2017e. We forecast that it will increase to RMB219.4bn in 2027e. In our view, the three major industry growth drivers are:Mass tourism: The demand for leisure

54、 travel is growing rapidly. The customer base has shifted from business travellers and high-income individuals to the generalpublic.Increasing affordability: Low-cost airfares now account for c1.2% of per capita disposable income. This means a large part of the population can now afford to fly. Mass

55、ive low-frequency and price-sensitive travellers have fuelled the demand forLCCs.The supply side: 1) The government is loosening aviation regulations, which benefits LCCs; 2) the construction of new airports showcased by Daxing Airport in Beijing and the expansion of existing facilities makes it pos

56、sible for LCCs to obtain better time slots; and 4) the mass production of a domestic aircraft boosts the industry further after2021e.Exhibit 18. Passenger traffic and growth of Chinese LCCsExhibit 19. Market share of passenger traffic of Chinese LCCs-2007201020132016 58 121658 121621273439469911553

57、62 74 853850%0% 4%5% 10%81010%35%Chinas low-cost carriers passenger traffic (milliontrip)YOY(Right axis)2005 2007 2009 2011 2013 2015 2017Low-cost carriers market shareSource: CAAC, HSBCQianhaiSecuritiesSource: CAAC, HSBC QianhaiSecuritiesInitiate coverageThe company is a pioneer and market leaderTh

58、e company has two brands: Juneyao and 9 AirThe only listed regional airlineSpring Airlines (601021 CH, RMB43.30, Buy, TP RMB54.96)The company is a pioneer and market leader in Chinas LCC sector. Spring Airlines has good corporate governance and a well-established employee incentive system. In terms

59、of operations, strict cost controls are in place and the airline has the highest passenger load factor, aircraft utilisation rate and net margin among Chinas listed airlines. Spring Airlines has been growing rapidly. In 2013-18, its revenue passenger kilometres (RPK), revenue and net profit grew at

60、a CAGR of 16.6%, 14.8% and 15.5%,respectively.Since 2017 the company has stepped up efforts to balance its domestic and international route networks, which boosted its yield and profitability. We think the bottoming out of ancillary businesses in 2018 leaves ample potential for earnings growth. The