China airlines: turbo fans will be vindicated by demand surge

Chinese aviation suffered a setback recently when the US popped an overflying spy balloon. But the civilian branch of the industry is more buoyant. A rebound in passenger numbers will help China’s numerous airlines recover from historic losses — and contribute to upward pressure on oil demand.

Chinese airlines are ramping up long-haul international flights as Covid restrictions ease. The Chinese economy is rebounding more strongly than expected as the country emerges from lockdowns.

China is projected to deliver around half of a forecast increase in global oil demand of almost 2mn barrels a day this year, according to the head of the International Energy Agency. Aviation will contribute to that.

International flights at local carriers are up more than three-fold in January as Chinese students and tourists take their first trips abroad for months. China was the world’s largest source of outbound travellers before the pandemic. 

China’s eight big airlines suffered record losses last year. Flag carrier Air China led the red ink splurge, which totalled Rmb70bn ($10.3bn) for the peer group in the first half alone. Debt is climbing.

Shares of the biggest carriers Air China and China Southern are down this year despite a rapid rebound in passengers. Fuel costs account for well over a quarter of the operating costs for the largest carriers. While jet fuel prices have fallen over the last week, they are still up about 10 per cent compared with the same time last year.

Increasing demand from Chinese airlines will put upward pressure on oil. This is trading well below last summer’s highs, at about $82 per barrel of Brent. The wider effect should not be overstated — jet kerosene only accounts for 7 per cent of global oil demand. But, globally, the IEA expects it to provide an additional 840 kb/d of demand in 2023, the largest source. Chinese airlines are bracing themselves for steeper input costs.

The good news is that terrible 2022 numbers will flatter airline results in 2023. Moreover, pent-up demand gives airlines leeway to increase fares, offsetting pricier fuel. The worst of the turbulence is behind the sector.