China’s major airlines—Air China, China Eastern, and China Southern—are facing profit declines despite a strong rebound in passenger numbers. This dip in profitability, seen during the third quarter, reveals a more complex issue: the impact of China’s slowing economy on consumer behavior and pricing within the aviation sector. Despite record-breaking summer passenger volumes and fuller planes than previous years, these carriers are under pressure due to reduced ticket prices, as domestic flyers increasingly favor cost-effective travel options amid tightening budgets.

Beijing-based Air China reported a net profit of 4.14 billion yuan ($581 million) for the quarter, a slight drop from 4.24 billion yuan in the same period last year. China Eastern’s profits fell even more sharply, down 28.2% to 2.63 billion yuan. Meanwhile, China Southern, the nation’s largest airline, noted “strong demand” but still saw a 23.9% decrease in profit to 3.19 billion yuan. While these airlines increased capacity and reported fuller planes, revenues were limited by reduced ticket prices, which rose by only 4.6% across the quarter. This reflects a broader trend in the airline industry where supply is outpacing demand, resulting in price reductions.

Aviation Industry Faces Global Struggles Amid Post-Pandemic Recovery

China’s experience is part of a larger global trend. The post-pandemic travel surge that buoyed profits for airlines worldwide is beginning to show signs of waning. While demand remains relatively strong, overcapacity and sluggish yields are making it difficult for airlines to maintain profits. In China, these challenges are amplified by a slower return to international flights, as the country lifted its pandemic travel restrictions later than many other nations. Domestic capacity is currently above 2019 levels, but international flights remain significantly below pre-pandemic volumes. As airlines work to restore overseas routes, the cost pressures from maintaining excess capacity without matching demand have become increasingly evident.

This scenario is echoed in markets outside of China, where airlines are similarly contending with pricing pressures as they rebuild capacity. For example, in North America and Europe, demand is stabilizing, but airlines are having to carefully balance ticket pricing against operational costs to avoid profit erosion.

Consumer Demand Shifts as China’s Economic Slump Continues

The root cause of the profitability challenge in China’s aviation sector is deeply tied to broader economic conditions. China’s economic recovery has been hampered by high youth unemployment, a real estate crisis, and restrained consumer spending despite Beijing’s recent stimulus efforts. Customers are tightening their belts, opting for lower-cost options, which puts pressure on premium full-service airlines like Air China and China Eastern. Data from FlightMaster, a China-based aviation data firm, shows that domestic airfares in July and August were down 17% from last year and even 1% lower than pre-pandemic levels in 2019. Meanwhile, international fares dropped 25% from last summer and are 12% below 2019 prices.

These changes in airfare reflect a new reality in China: spending on non-essential items, including air travel, is slowing as economic uncertainties weigh on households. This phenomenon affects not only major full-service carriers but also smaller low-cost carriers, although they have managed to cushion some of the losses. Spring Airlines, China’s leading low-cost airline, reported a smaller profit decline than its full-service counterparts, down 32.4% year-on-year to 1.2 billion yuan. This demonstrates how cost-sensitive passengers are gravitating toward budget airlines for travel within China and internationally, as they prioritize affordability in the face of economic pressures.

Broader Implications for the Global Market

The challenges faced by China’s airlines hold significant implications for the global aviation industry. Given China’s size and influence on international travel, shifts in Chinese consumer behavior and demand for flights can have ripple effects on airlines, tourism, and global markets. Lower outbound travel demand from China has already impacted countries and industries reliant on Chinese tourists. With ticket prices dropping significantly, outbound airfares from China between January and September 2024 were 39% lower than last year, according to data from ForwardKeys, another aviation data firm. This dip not only affects airlines but also reduces revenue for popular destinations that depend on high-spending Chinese tourists, from Japan and South Korea to Europe.

Beyond tourism, global airlines that operate in China may also feel the squeeze. While they may seek to capture a share of Chinese travelers, reduced ticket prices and high operating costs in China present a dilemma. In response, some international airlines are recalibrating routes, adjusting capacity, and even scaling back services to China to prevent profit losses. For instance, airlines from North America and Europe that had aggressively expanded routes to China pre-pandemic are now adopting a more cautious approach.

Domestic Aviation vs. International Competition

In light of these challenges, Chinese airlines are focusing on maximizing efficiency and expanding their international routes, albeit at a gradual pace. Air China, China Eastern, and China Southern are carefully evaluating their international expansion plans to avoid saturating the market with too many seats at unprofitable prices. This cautious approach reflects a shift in strategy for Chinese airlines, which had previously prioritized rapid growth over profitability. With domestic capacity at an all-time high and international routes rebuilding more slowly, Chinese airlines are aiming to strike a balance that stabilizes revenue without creating unsustainable pressure on ticket prices.

As Chinese airlines navigate these economic and market challenges, their strategies may set a precedent for other airlines facing similar pressures in the global market. The focus on cost control, strategic expansion, and price adjustments could serve as a model for airlines worldwide as they adapt to post-pandemic realities.

Looking Forward

The outlook for China’s airline industry remains mixed. While the economic slowdown and declining fares present clear challenges, there is also an opportunity for Chinese airlines to capitalize on the shift toward low-cost travel. In the long run, airlines may need to diversify revenue streams, exploring options such as ancillary services and partnerships with international carriers to remain competitive. For global markets, the ongoing situation with Chinese airlines underscores the fragile balance in the post-pandemic aviation sector, where fluctuating consumer demand, economic uncertainties, and evolving travel trends continue to shape the industry’s recovery trajectory.

(Adapted from FiniMize.com)