Chris Tarry reflects on China's aviation potential following his recent visit
What has been apparent throughout 2010 is not only the extent of the multi-speed recovery from the downturn, but also the growing opportunity gap between airlines in structurally growing markets and those that are predominantly dependent on the vagaries of the economic cycle. We have recently spent some time travelling in China and Hong Kong and this, among other things, underlined the challenges and opportunities faced by airlines in different parts of the world.
In China domestic air travel prospects are almost immeasurable. We visited one city with a population of some 0.6 million which attracts some 10 million visitors a year. Of these some 9 million are from within China.
It is possible to draw some opportunity parallels with the USA at the start of the jet age, both in terms of capacity needs and potential for a domestic aircraft in the 150 seat segment.
The population of China is 1.4 billion. In 2009 there were 215 million domestic airline passengers, with a propensity to travel of 0.15 times per person per year. Compare this with the USA in 1958, when the jet age effectively began. The US population was 174 million, with 48 million domestic passengers and a propensity to travel of 0.28. Fast-forward to 1980 and the US population had hit 227 million, domestic passengers had grown to 271 million and the propensity to travel had increased fourfold to 1.2 times. Last year the US population reached 310 million. Domestic passenger numbers were some 630 million, with a propensity to travel of just over 2 times.
For a more formal forecast of likely outcomes over the next few generations we would need to take income distribution into account, but even so the underlying trend is very clear.
Moving away from China and on to nearer-term issues, let us take a look at the evolving traffic picture around the world. Remember, increased traffic does not necessarily spell success. As has been seen in the USA, capacity control has brought significant yield improvements. And, as business traffic has returned, the new mix has benefited the European majors.
Nonetheless, the latest airline traffic figures show some very dramatic growth. In September Air China's passenger traffic grew by some 20% with cargo up by almost as much. Sticking with Asia, China Southern's August results show passenger traffic up 22% and freight up 83%. Meanwhile, over at Cathay Pacific, September RPKs in September were up 15% with cargo up 9%.
Regional differences become clear when you compare these with British Airways' September results, where RPKs rose just 1.3% and cargo was up 1.4%. Similarly at Air France KLM the increases were 1.8% and 6.0% respectively, while at group level Lufthansa reported increases of 6.8% and 14.9%.
Given this variation, it is important to remember the end of the telescope that each airline is viewing the world from. While any airline operating primarily in a mature and cyclical market might want to increase their presence in Asia, airlines based in Asia - while having links with the more mature parts of the world - will inevitably want to maximise their opportunities in the wider local market.
There is also the issue of valuation. While market capitalisations are, at best, a starting point they do reveal some very significant differences in value. Using prices and dollar exchange rates at the time of going to press, Air China's market capitalisation of $25 billion is some five times that of both BA and Air France-KLM. BA's merger partner Iberia had a market value of $4.1 billion and AMR some $2.1 billion.
Europe's biggest airline on this measure is Lufthansa at $9.5 billion, but the German carrier is easily pipped by Singapore Airlines at $15 billion, China Eastern at $13.8 billion and Cathay Pacific and China Southern, both at $11.5 billion.
This makes it difficult to understand why an Asian airline might want to merge with a mature market player, other than where they might be the acquirer or dominant partner. But even then they could be diluting their growth. While non-Asian airlines may talk about greater exposure to this market, at best it will be only on the periphery.
For investors wanting Asian exposure, the best route is clearly to buy shares in an airline in the region - but, as ever, selectivity will be the key for success.
Source: Airline Business
