Analysis: China Express bets on subsidised routes, home-grown jets as path to profits

BOCOM International Holdings

12/05/2021 07:05

* Reported 22% rise in profit in 2020 despite pandemic
    * Receives more CAAC subsidies than China Eastern, China
Southern
    * Expects Chinese-made planes to make up majority of fleet
by 2025

    By Stella Qiu and Jamie Freed
    BEIJING/SYDNEY, May 12 (Reuters) - China Express Airlines
 002928.SZ , a regional carrier based in the southwestern city
of Chongqing, is betting that its business model of flying
heavily subsidised routes using an increasingly Chinese-made
fleet will give it an edge over rivals.
    The airline reported a 22% rise in annual profit last year -
a near-impossible feat in the pandemic-ravaged aviation industry
- thanks to subsidies of more than 625 million yuan ($97.14
million) that accounted for 87% of its total profits before tax.
    Routes in third and fourth-tier cities, 90% of which are
monopolies, helped fuel growth and made it the only listed
Chinese airline to make a profit in 2020.
    That put the previously obscure carrier on the radar of
investors seeking faster-growing, domestic-focused alternatives
to China's three biggest airlines.
    "The company has very few direct competitors nationwide, but
only faces localised competition on their shared routes," said
Wu Yifan, transportation analyst at Huachuang Securities.
    Shares in China Express, with a fleet of 52 mostly
Western-made planes as well as 100 domestically manufactured
jets on order, surged 56% last year and have risen close to 20%
this year. 
    It is benefiting from Beijing's drive to develop new
airports in regional areas, as well as a push for locally built
jets to challenge the dominance of Airbus, Boeing and Brazil's
Embraer.
    The airline's strategy, which depends on continued
government route subsidies and the reliability of relatively
unproven Chinese-made planes, is not without risk.
    But analysts say the benefits from the subsidies and other
government policies should continue for at least a few years. A
blueprint issued by the State Council in February said China
will build 150 civil airports in the next 15 years, mostly small
facilities in less-developed regions.
    Guosheng Securities forecast the airline's earnings will
double from last year's 613 million yuan to 1.24 billion yuan by
2023.
    In a sign of its strategic importance, China Express was the
first private airline in China to take delivery of the
home-grown ARJ21 regional jet; it plans to buy a mix of 100
ARJ21s and C919s, a boost to state plane maker Commercial
Aircraft Corporation of China (COMAC).
    China Express predicts COMAC planes will account for the
majority of its fleet by 2025. 
    The Civil Aviation Administration of China (CAAC) will offer
favourable airport slots to domestically made airplanes and
favour them in fleet planning over the next five years, the
agency said late last year.
    China Express set a record in 2020 for the most time flown
by any ARJ21 jet in a single day at 13.53 hours, it said in
December. But the CAAC, out of safety concerns, asked the
airline to cut back on its utilisation and build up public
confidence in the jet slowly, a source with direct knowledge of
the matter told Reuters. 
    China Express, which had declined an interview with Reuters
to discuss its strategy, referred any comment on ARJ21
utilisation to CAAC. CAAC did not respond to a Reuters request
for comment.
    
    DOMINANT PLAYER 
    Founded in 2006, China Express is the only listed airline
focused on regional aviation in China, making its investment
profile very different from the three big state-owned carriers.
    From CAAC alone, China Express, though tiny compared to the
biggest airlines, got the most in government subsidies, at 217
million yuan, followed by China Eastern's 186 million yuan and
China Southern's 130 million yuan. It is set to get 297 million
yuan this year.
    It also has other fixed-price deals with local governments
and airports that pay it regardless of passenger numbers.
    Subsidised routes are a small business for China's biggest
three airlines, which are focused on reviving the lucrative
traffic between big cities.
    Other regional airlines in China, part-owned by local
governments, are small and focus mostly on local routes. 
    In Xinjiang, China Express chose Korla, the region's
second-largest city, as its regional hub and has linked it with
around 15 other cities across the region. It has cooperated with
big airlines, which usually have the best time slots at big
airports, to direct traffic from Urumqi to Korla. 
    The airline is looking to replicate that in Yunnan, a
popular tourist destination that has poor infrastructure, after
signing an agreement last year with Dehong Prefecture government
to make it a regional hub. 
    There are signs the subsidies are luring tourists.
    Philip Yu, a travel enthusiast, said he had flown China
Express around half a dozen times over the last year as
pandemic-related restrictions kept him from flying overseas.
    "I would recommend China Express to any of my friends who
want to fly within regions like Xinjiang, Guizhou or Inner
Mongolia, particularly places where high-speed railways have yet
to reach or have a limited presence," he said. "It's really
convenient."
($1 = 6.4610 Chinese yuan renminbi)

 (Reporting by Stella Qiu in Beijing and Jamie Freed in Sydney.
Editing by Gerry Doyle)
 ((Jamie.Freed@thomsonreuters.com;))