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Chinese language airways will not be worthwhile even when home journey recovers, the analyst says

SINGAPORE – China's passenger traffic could rise 10% year-over-year during a critical holiday season starting later this week – but that won't help Chinese airlines become profitable until international travel resumes, an analyst said.

Chinese airlines, like their counterparts, have been hit by a slump in travel around the world as countries around the world have closed borders and limited the movements of people to help contain the spread of the coronavirus. Domestic travel in China has rebounded strongly as the country recovered from the pandemic, but Chinese airlines will continue to feel the pain, said Ivan Su, an equity analyst at Morningstar.

“Without this international demand, according to our analysis, it is unlikely that Chinese airlines can return to profitability,” Su told CNBC's Street Signs on Tuesday.

"The overriding issue for Chinese airlines is to contain losses over this period rather than make profits," he said. "Until we see a significant increase in ROI, we don't really believe that Chinese airlines will be able to make big profits on domestic routes for long periods of time."

Su added that he didn't expect international passenger traffic to China – which has declined 95% for a year – to pick up sharply this year.

However, the Chinese have become avid travelers within their own country as the international borders remain largely closed.

In August, domestic passenger traffic in China was 20% lower than a year ago. In the later weeks of September they were higher than a year ago, Su said.

"On the way to Golden Week, I wouldn't be surprised if domestic passenger numbers increased 10% year over year," Su said of the weeklong holiday of the Mid-Autumn Festival, which starts in China on Thursday.

Fight for profits

Many Chinese airlines will struggle to make profits this year, partly due to the unlimited airline tickets they have introduced, Su said. Unlimited flight tickets are prepaid tickets that are purchased for a flat fee and allow any number of trips within a certain period of time.

Su said this means airlines are making less money, on average, for each trip on the passes than for tickets purchased individually.

As Chinese airlines re-deploy aircraft to serve the domestic market and compete with each other for local passengers, there is also oversupply and competition that drives down prices, Su said. He added that ticket prices had been weak in the past few weeks.

And while the demand for cargo has been robust, it's not a game changer as cargo makes little contribution to an airline's operations, Su said.

The analyst's first choice in this sector is China Southern Airlines as the airline has increasingly focused on domestic travelers and is strong in cargo transportation.

The airline is also facing less exposure to business travel – a segment that would be "permanently damaged" by the coronavirus pandemic, as there is less business travel, Su said.

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