Report Targets China Cargo Sky

     The financial viability of China’s airlines was recently put under Macquarie Research analysts’ considerable microscope.
     While the performance of their respective freight divisions is a major concern for the country’s leading airlines, not all carriers are suffering equally.
     According to Macquarie, Chinese airlines are due for a “choppy ride” in the months and years ahead, with margins set to remain thin despite robust domestic passenger traffic growth.
     International pax movements will prove the “new growth engine” for volumes as disposable income rises, but these are currently loss-making.
     Domestic passenger revenue streams are also under pressure from LCCs and high speed rail alternatives.

     In terms of financial performance, Macquarie estimates China’s leading airlines were all loss-making in the first quarter of 2014 except for Air China, although the analyst expects profits to improve as the year progresses.
     On the cargo side, Macquarie believes China’s airlines have scope to make numerous performance improvements which could help boost bottom lines, but also concludes that major gains will only come when global air freight markets fully recover.
     “The air cargo segment remains a drag on earnings, as we estimate global air cargo markets have remained loss-making this year,” said the analyst, adding that Air China Cargo had reported an RMB 349 million loss in 2013.
     Macquarie said one of the reasons for the losses by China’s airlines was that the global air cargo market was still suffering from excess supply despite global airlines reducing freighters operated.
     “Although air cargo demand has improved, it is offset by capacity increasing,” said the report.
     Macquarie believes Air China, one of the country’s major carriers in terms of its cargo performance due to its lower cost base, may have seen its air cargo segment return a profit in 2Q14.
     “The air cargo sector was loss-making in 2013, but Air China’s cargo business was profitable in recent months due to a change in freighters from B747-400BCF to B777, which offer an estimated 5-10 percent cost savings, and we believe yields have yet to rebound,” said the report.
     “Further, the co-operation with China Postal Airlines on its courier business is a higher margin than Air China’s in-house cargo business.”
     For China Eastern Airlines, cargo losses “remain a drag on earnings despite a strategy to reduce freighters via a long-term plan of operating only 6-8 compared to 14 at end-2013.”
     China Southern Airlines’ cargo operation is currently loss-making, but its exposure is low given that cargo only accounts for some 7 percent of revenue.
     Macquarie agrees with other analysts that air cargo markets are picking up as 2014 progresses, but carriers still face a stern battle for modal share. “We believe demand has disappointed due to sea transport substitution,” said Macquarie.
     “Air cargo is the primary mode of transport for high-tech goods such as handsets and notebooks, and Macquarie’s tech team forecast notebook shipments to bottom in 2Q14. Further, we expect a spike in air cargo yields as new hi-tech products are launched.
     “We estimate air cargo demand is likely to be driven by an improving global economy as this would bring back the ‘feel good factor’ and drive purchases of higher-value goods as low-value consumer goods, such as apparel and furniture, are transported by sea.”
     However, even in an improving market, China’s leading carriers will face challenges on yields and margins. “We believe the cargo business remains under pressure,” said the analyst. “We estimate cargo yields to decline 0.7 percent this year before a gradual rebound to 0.3 percent and 1.3 percent year-on-year in 2015 and 2016, respectively.”
Sky King

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