CITIC Securities: Dual constraints on production capacity at all times, focusing on the aviation recovery opportunity

According to the financial news app Zhitong Finance, Industrial Securities released a research report stating that the demand side of aviation transportation is currently in a short-term post-epidemic recovery period, with long-term benefits from penetration rate improvement. GDP growth and consumption upgrading are the core driving forces for the growth of aviation demand. On the supply side, there are dual constraints of production capacity and flight slots. On one hand, flight slot capacity is affected by airspace control and airport capacity, making it difficult to break through the supply limit; on the other hand, the policy has slowed down the speed of aircraft introduction. Market-oriented ticket pricing combined with a slowdown in capacity expansion allows for price increases even after demand recovery.

Aviation transportation is a mode of transportation that uses airplanes as a means of transporting goods under the conditions of aviation routes and airports. The market size of aviation transportation in China is about 700 billion yuan, and market participants can be divided into full-service airlines, low-cost airlines, and regional airlines according to their business models. The formation of civil aviation ticket prices mainly adopts the "supply - response" mechanism, influenced by supply and demand relationships, resulting in significant price differences between peak and off-peak seasons, and diversion from high-speed rail and other transportation modes.

Demand side: Currently in a short-term post-epidemic recovery period, with long-term benefits from penetration rate improvement. In January-March 2024, domestic and international civil aviation passenger traffic increased by +29.0%/+529.8% year-on-year, respectively, recovering to 114.3%/78.0% of the same period in 2019. The visa-free policy continues to be strengthened, boosting the recovery of international routes. During the May Day holiday, the number of inbound and outbound travelers reached 8.466 million, a 35.1% increase from the same period last year, returning to the level of the same period in 2019. In the long term, GDP growth and consumption upgrading are the core driving forces for the growth of aviation demand. In 2023, China's GDP growth rate was 5.2%, higher than the global average of 2.1%, with GDP growth supporting business travel demand and consumption upgrading opening up the outbound tourism market. In addition, China's aviation penetration rate is relatively low, with an average of 0.44 air trips per capita in 2023, one-fifth of the United States. Airbus predicts that by 2042, China's aviation market penetration rate is expected to reach 1.7 trips per year, with a CAGR of 5.5% from 2019 to 2042, leading other markets.

Supply side: Facing dual constraints of production capacity and flight slots. On one hand, flight slot capacity is affected by airspace control and airport capacity, making it difficult to break through the supply limit. A large number of no-fly zones and restricted areas are present in China's airspace, with civil aviation actually utilizing only 20% of the total airspace. The utilization rate of major domestic airports is close to saturation, with Beijing Capital Airport, Shenzhen Bao'an Airport, and Shanghai Hongqiao Airport all exceeding 100% capacity utilization in a normal year like 2019. On the other hand, fleet expansion is slowing down. The policy has gradually slowed down the speed of aircraft introduction, with the "14th Five-Year Plan for Civil Aviation Development" proposing to "scientifically regulate the total number of flight slots and the speed of fleet introduction to ensure overall supply-demand dynamic balance." The speed of aircraft introduction by major airlines has slowed down, with a CAGR of 2.5% for the six major airline fleets from 2019 to 2025, significantly lower than the previous 10% growth rate.

Policy side: Market-oriented ticket pricing combined with a slowdown in capacity expansion allows for price increases even after demand recovery. In 2015, the Civil Aviation Administration issued the "Implementation Opinions on Promoting the Reform of Civil Aviation Transport Price and Fee Mechanism," proposing that by 2017, the government-guided prices for domestic air passenger tickets on routes with established competition would be changed from government-guided prices to market-regulated prices By 2020, the mechanism for determining domestic air passenger ticket prices in China was mainly market-oriented. Since the Civil Aviation Administration issued the "Notice on Further Deepening the Reform of Domestic Airline Transport Prices" in 2020, the full ticket prices for trunk routes have been gradually increasing each season. During the "14th Five-Year Plan" period, the annual growth rate of the industry's fleet size has slowed down, and the improvement in supply and demand structure may continue to drive the centralization of ticket prices.

Business Recommendations: (1) After the epidemic, the aviation transportation industry continues to recover, consumer potential is gradually being unleashed, supply is relatively rigid, market-oriented ticket prices open up profit space, overall industry risks are mitigated, and industry loans can be appropriately increased. Focus on the layout of corporate airline networks, and avoid regions with dense high-speed rail routes and average travel demand for routes of 500-1300km; (2) Participate in the market through financial leasing, providing various modes of aircraft leasing business such as financial leasing and operational leasing; (3) Cooperate with a single airline company to expand to full-scale cooperation upstream and downstream of the industry chain, including upstream aircraft manufacturing, aviation material production, and downstream aviation logistics, business travel, tourism, and other fields