Since the reorganization of the airline groups in 2002, China's aviation industry has been developing steadily for 20 years, ranking the second and first position regarding the passenger and cargo traffic respectively in 2019. This should attribute to the aircraft fleet growth. This report aims to analyze the fleet in China, in terms of size, type, age, value, etc., to raise the pros and cons.

1. Nationwide

Currently, over 4,000 commercial aircraft are operated in China, including passenger aircraft, freighters and business aircraft. Currently, passenger aircraft takes the largest share (96%) of China's whole fleet, implying the huge demand and supply of the passenger traffic and the short in freighters.

Since China is a great manufacture and agricultural power where the e-business is developing remarkably as well, its demand in air cargo is undoubtedly huge. Based on the ratio the passenger aircraft to the freighters, it is convinced that most cargo demands are met by the belly hold of the passenger aircraft and foreign cargo carriers.

However, in the situation of COVID-19, most passenger flights have been ceased in China, exposing the insufficiency in the cargo capacity. Compared with the United States, this problem is more prominent: FedEx operates 370+ freighters which is nearly doubled of that in China.

According to such a situation, the State Council of China, recently, published the policy to promote air cargo development.

Figure 1 Ratio of Aircraft Type (by Purpose)

Data Source: CAAC, Airsavvi

For the aircraft size, narrow-bodied aircraft hold the largest proportion both on the passenger (82%) and cargo (71%) markets. On one hand, the demand on the short-haul market is strong both in passenger and cargo flights. On the other hand, considering the size of the freighter fleet, the lack in wide-bodied freighter restrict the air cargo development in China.

Figure 2 Ratio of Aircraft Type (by Aircraft Size; a. Passenger Aircraft, b. Freighters)

Date Source: CAAC, Airsavvi

Before C919 enters the commercial operation, China's fleet is occupied by Airbus and Boeing whose market shares exceed 40% (Figure 3). Due to the trade war between China and the United States, as well as the grounded B737 Max and B787 equipped with Rolls-Royce Trent 1000 series engines, airlines operating these two aircraft suffer severely.

To conclude, the size of China's aircraft fleet is large, especially on the passenger branch. Whereas, the gap in the freighters should not be neglected,

Figure 3 Ratio of Aircraft Type (by Manufacturer)

Data Source: CAAC, Airsavvi

2. Airlines' Fleet

In this part, the fleet of China's main airline groups is discussed in the perspective of the type, models, age and book value.

The "Big-Three", namely Air China Group, China Eastern Group and China Southern Group, own the largest fleet (over 600). In terms of the aircraft size, most widebodies are held by Air China, China Eastern, China Southern and Hainan Airlines (127, 90, 114 and 86 respectively) who performs actively on the long-haul market. As for the Medium and small airlines, they seldom add the widebodied aircraft into their fleet. First, it is difficult to compete with large airlines in the long-haul market. Secondly, to operate the giants, the expense on staff, equipment training, etc. will increase the financial burden.

Note: CA (Air China, Shenzhen Airlines, Kunming Airlines, Air Macau and Air China Cargo), MU (China Eastern, Shanghai Airlines and China Cargo Airlines), CZ (China Southern, Xiamen Airlines, Hebei Airlines, Jiangxi Airlines and Chongqing Airlines), HU (Hainan Airlines, Beijing Capital Airline, Tianjin Airline, Urumqi Airlines, GX Airlines, Air Guilin, Suparna Airlines, Fuzhou Airlines, Grand China Air, Lucky Airlines and Air Changan), HO (Juneyao Airlines and 9 Air), 3U (Sichuan Airlines), SC (Shandong Airlines), 9C (Spring Airlines) and G5 (China Express).

Figure 4 Aircraft Number of China's Main Air Carriers (by Aircraft Size)

Data Source: Relative Airlines' Annual Reports

The numbers of Airbus and Boeing aircraft are quite even of the big-three airlines , while with the reduction in the fleet scale, the single-aircraft fleet is mainly adapted. Benefits could be gained from the single-modelled fleet, including the reduction in costs of staff and equipment, the simplicity in aircraft management and training, and the convenience of aircraft and crew scheduling. However, when a serious flaw occurs to a model, the carrier mainly operating it will suffer deadly.

Figure 5 Aircraft Number of China's Main Air Carriers (by Manufacturer)

Data Source: Relative Airlines' Annual Reports

Since owning the aircraft is a huge investment, airlines slant to leasing (around 60% of the whole fleet), operating leasing in particular which could save more money. rather than purchasing the aircraft directly. This measure could mitigate the stress on the cash flow, however, the book value on the balance sheet is reduced as well.

Note: The leased aircraft of Shandong Airlines and Sichuan Airlines are not divided into financial and operating leased, due to the undisclosed ownership.

Figure 6 Aircraft Number of China's Main Air Carriers (by Ownership)

Data Source: Relative Airlines' Annual Reports

Since the airlines selected into the sample have operated over one decade, the average ages of their fleet are similar and relatively young (three to seven years). The "eldest" fleet belongs to the bigthree (over 6 years), while the regional carrier, China Express, operates the youngest airliners (3.16 years). Benefits of the young fleet are prominent, including better onboard experience, lower maintenance cost, less fuel consumption and fewer emission.

Figure 7 Average Aircraft Age of China's Main Air Carriers

Data Source: Relative Airlines' Annual Reports

Metrics above apply impacts on the fleet book value which is shown in Figure 8. Generally, the total book value is directly proportional to the fleet scale which could be seen from the gap between the big-three and the others. The book values of the big-three's fleet are over 180 billion CNY, while for the medium airlines, the value stays around 100 billlion. As for the average book value, since the discounts could be granted when ordering a large number of aircraft, the average book values of the big-three (around 260 million) are lower than the medium airlines (over 300 million). For the low-cost and regional airlines, due to the inherent value, the average book values of their fleet are lower as well (less than 240 million).

By observing the airlines other than the big-three, it could be summarized that the younger fleet

with more wide-bodied aircraft has a higher average book value. Taking Shandong Airlines and Juneyao Airlines for instance, though the number of the aircraft owned by the former is higher (31 vs. 23), since Juneyao owns B787 and its fleet is younge (less than 5 years), the average book value (371 million vs. 315 million) of its owned fleet is higher than that of Shandong Airlines.

Note: Since CA, MU and CZ have adapted the IFRS 16 to include the operating leased aircraft into the balance sheet, while the others have not, the book value of the lease part should be higher. Besides, since Sichuan Airlines do not disclose the details of the fixed assets, its average book value of the owned aircraft is not computed here.

Figure 8 Aircraft Value of China's Main Air Carriers.

Data Source: Relative Airlines' Annual Report

3. Pros and Cons of the Single-modelled Fleet

Compared with the multi-model fleet, the single-modelled fleet could reduce the costs on staff, material, equipment and maintenance, and simplify the management and training, which are advantages for an airline operation. Due to this, many successful airlines adopt this fleet strategy, such as Ryanair operating over 400 B737 and ranking the top in Europe regarding the aircraft number.

Notwithstanding, the shortcoming of the single-modelled fleet is also obvious that the systematic failures in one particular aircraft model will bring a catastrophic result to the fleet operator. Taking Norwegian Airlines, for example, its fleet mainly consists of B737 including 34 B737 Max and B787 mainly equipped with the Rolls-Royce Trent 1000 series engine. Currently, the grounded aircraft hold nearly 30% of its whole fleet, resulting in the tensive cash flow since 2018, and the COVID-19 even pushes it to the edge of bankruptcy. For the Chinese airlines, Xiamen Airlines and Shandong Airlines mainly operate B737, then the halt production of B737 NG restricts their fleet expansion.

Therefore, the adaption of the single-modelled fleet should be deeply considered.

4. Conclusions

In this report, China's overall commercial aircraft fleet is analyzed, as well as the major metrics of the main carriers including the aircraft size, manufacturer, age and book value. Besides, the pros and cons of the single-modelled are discussed as well. Findings are drawn as below.

i. The passenger aircraft are adequate (3,700+) in China, while a large gap of the freighters is to fulfil (only 140+).

ii. The narrow-bodied aircraft hold the largest share (81%) of the aircraft market in China, while most wide-bodied aircraft are owned by the big-three (75%), implying the less competitiveness of the medium and small airlines in the long-haul market.

iii. More aircraft are leased (2/3 or so) rather than purchased by Chinese air carriers.

iv. The average book values of the big-three are around 260 million CNY, while for the medium legacy airlines, the values are more than 300 million. Younger fleet with more wide-bodied aircraft has a high book value on the balance sheet.

v. Large airlines in China, namely the big-three and Hainan Airlines Group, tend to adapt mixed fleet (typically, the numbers of Airbus and Boeing aircraft in their fleet are similar) while medium and small airlines prefer single models.

vi. While airlines could benefit from the single-modelled fleet from the financial and operating perspective, the risk of the systematic failure of this model should be considered thoroughly.

According to the social-economic situation in China, fleet planning is not only the task for the airlines, and the government should participate in this work actively as well. Recently, the policy for the promotion of air cargo is a good example, and, in the future, more negotiations between stakeholders are needed.

Data source: Airlines'Annual Report, Airsavvi | Analyzed by Big Blue Hole