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CHINA AIR TRANSPORTATION SECTOR 2019 Q1

An EMIS Insights Industry Report

ASK Available Seat-Kilometers

ATK Available Tonne-Kilometers

AFTK Available Freight Tonne-Kilometers

CAAC Civil Aviation Administration of China

CATA China Air Transport Association

CJV Contractual Joint Venture

CRS Computer Reservation System

EJV Equity Joint Venture

FIE Foreign-Invested Enterprise

JV Joint Venture

LCC Low-Cost Carrier

MOFCOM Ministry of Commerce

MOT Ministry of Transport

NDRC National Development and Reform Commission

RPK Revenue Passenger-Kilometers

RFTK Revenue Freight Tonne-Kilometers

RTK Revenue Tonne-Kilometers

SHE State-Holding Enterprise

SOE State-Owned Enterprise

Any redistribution of this information is strictly prohibited. Copyright © 2019 EMIS, all rights reserved. CONTENTS Domestic Foreign Investment Policy Government Policy REGULATORY 05 ENVIRONMENT Shandong Hainan China Eastern Airlines Corp Ltd Air China Southern Airlines Ltd Co 04 Main Players Highlights Timeline ChinaAirlines COMPETITIVE 03 LANDSCAPE Activity M&A Top Main Sector Indicators Sector Sector Quarterly Summary China Air Transportation Sector 2018 Q4 Update Quarterly SECTOR02 IN FOCUS Restraining Driving Sector Sector Overview Sector in Numbers 01EXECUTIVE China Ltd M&A DealsM&A COMPANIES IN FOCUS IN COMPANIES Highlights Outlook Snapshot Airlines Ltd Holding Co Forces Investment Policy Airlines Ltd Co Forces SUMMARY p.43 p.23 p.27 p.12 p.5 CONTENTS “Big Three”“Big Airlines Main Indicators Main Indicators Main Highlights Throughput PointFocus 07FREIGHT TRANSPORT Three”“Big Airlines Main Indicators Main Indicators Main Highlights Throughput PointFocus 06PASSENGER TRANSPORT Events Events - - Busiest Airports by Freight Busiest Airports by Passenger p.49 p.55 CHINA AIR TRANSPORTATION SECTOR 2019 Q1 An EMIS Insights Industry Report CONTENTS

01 EXECUTIVE SUMMARY

Sector in Numbers

Fastest No.2 No.2 Growing Air Passenger Air Freight Market in the Market in the Air Passenger World World Market Globally

7.4mn 611.7mn 235 tonnes people Number of Civil Air Freight Air Passenger Airports Traffic Traffic

3,615 83.2% 73.2% Transport Air Passenger Air Freight Aircraft Fleet Load Factor Load Factor

Data for 2018. Source: IATA, CAAC, CEIC

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Sector Overview

China’s aviation sector is of key importance to the national economy, reflecting its increasing level of modernisation and robust growth. China’s vast territory and its geographical location assign the aviation sector a role that other transport methods cannot replace in promoting international political, economic and cultural communication, and tourism. China is the world’s second-largest aviation market after the US, transporting 611.7mn air passengers in 2018, according to the Civil Aviation Administration of China (CAAC).

Entry Modes Despite the gradual opening of China’s aviation sector to new entrants, the huge capital investments required, low profit margins and extremely high exit barriers, all make it relatively hard to enter the sector. It is still highly regulated by the Chinese government, as reforms have been slow. The sector was opened to foreign entrants in 1994, while domestic private investors were allowed to enter only in 2005. The sector is dominated by China’s “Big Three” state-holding carriers – China Southern Airlines, China Eastern Airlines and Air China, which are strongly supported by the government.

Segment Opportunities The major air carriers have been actively expanding their fleets in recent years to meet the rapidly growing market demands. To foster the sector’s growth, the Chinese government is committed to developing commercial aircraft manufacturing. In 2016 the first domestically-produced jet model – the ARJ21, made by the state-owned Commercial Aircraft Corporation of China (COMAC) – entered service after ten years of delay. Foreign technology and components had a significant role in its development and design – about 40% of the jet’s equipment is made by 19 foreign suppliers. Aircraft design and construction can bring opportunities for foreign partners, as China still lacks experience in high-tech aircraft equipment. There are numerous opportunities also in the area of catering and aircraft maintenance, in which experienced staff are lacking and entry barriers are relatively low.

Government Policy Two major government strategies are creating conditions for further growth in the sector. The first is the Belt and Road initiative, launched in 2013 and aimed at boosting trade with former Silk Road countries. The second is the country’s plan for the development of its western provinces. The expansion of the country’s air infrastructure and the gradual liberalisation of its aviation market will support the sector’s development in the coming years.

Source: CAAC, AINonline, COMAC

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Sector Snapshot China Airlines

LOAD FACTOR

83.2% 73.2% Air Passenger Air Freight

PASSENGERS FREIGHT

Turnover Traffic Turnover Traffic Domestic*: Domestic*: Domestic*: Domestic*: 788.9mn tonne-km 548.1bn passengers 7.6mn tonne-km 5mn passengers International: International: International: International: 282.2mn tonne-km 63.7bn passengers 18.7mn tonne-km 2.4mn passengers

DOMESTIC MARKET Sales Revenue: RMB 746.1bn** Fixed Asset Investment: RMB 239.5bn**

KEY PLAYERS REVENUES 1. China Southern Airlines: RMB 143.6bn 2. Air China: RMB 136.8bn 3. China Eastern Airlines: RMB 114.9bn 4. Hainan Airlines: RMB bn 5. Shandong Airlines: RMB 18.8bn Note: Data for 2018. * Including Hong Kong, Macau and Taiwan. ** Data for 2017. Source: CAAC, CEIC, Company Data

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Sector Snapshot China Aviation Sector

In 2018 China's economy grew at its slowest pace in 28 years, with gross domestic product (GDP) rising by 6.6%, representing a decline of 0.2 pp over 2017. As a result of the economic slowdown, the intensifying market competition in the sector, oil price fluctuations and currency devaluation, in 2018 China’s air transportation sector witnessed weaker y/y growth.

Demand for air travel in China continued to expand although at a slower pace, driven by a rising middle class and increasing number of both domestic and international tourists travelling to and from China. According to the CAAC, in 2018 the total air transport turnover of the entire sector – an indicator that expresses both passengers and freight carried, measured by revenue tonne-kilometers (RTK) - reached 120.6bn tonne-km, representing a y/y increase of 11.4%. Air passenger turnover, measured by revenue passenger-kilometers (RPK), reached almost 1.1tn passenger-km, while air freight turnover, measured by revenue freight tonne-kilometers (RFTK) was 26.2bn tonne-km, representing increases of 12.6% y/y and 7.5% y/y, respectively.

In 2018, China’s airlines transported a total of 611.7mn passengers, an increase of 10.9% y/y, compared with the 13% y/y increase in 2017. International air passenger traffic experienced a significant increase of 14.8% y/y to 63.7mn passengers in 2018, driven by strong growth in outbound leisure and business travel and supported by the easing of visa regulations for Chinese tourists travelling abroad. Domestic passenger traffic grew by 10.5% y/y to 548.1mn passengers, fuelled by the rising accessibility of travel and expansion of low-cost carriers (LCCs). In 2018, domestic airlines’ freight traffic reached 7.4mn tonnes, up by 4.6% y/y versus a 5.6% y/y growth in 2017. Freight traffic on domestic routes rose by 3.3% y/y to 5mn tonnes, while international freight traffic went up by 10.5% y/y to 2.4mn tonnes.

During 2018 China’s airlines added 167 new international routes, including 112 with countries, which are part of the Belt and Road initiative. At the end of 2018, China had bilateral air transport agreements with a total of 126 countries. To meet the rising demand for air travel, Chinese airlines were very active in their fleet expansion. China’s “Big Three” state-controlled carriers – China Southern Airlines (CSA), China Eastern Airlines (CEA) and Air China – introduced 104, 67, and 50 aircraft, respectively.

In 2018, all of the top five listed companies in terms of sales revenue (the “Big Three” plus Hainan Airlines and Shandong Airlines) witnessed positive y/y growth in revenues, however their net profits declined over 2017, due to the rising operating expenses. The “Big Three” transported 60.6% of China’s air passengers and 61.6% of air freight in 2018. In 2017, China Southern had the highest carriage domestically in terms of revenue – 73.2% of its total revenue was generated from domestic flights. CEA and Air China shared the leading position on international routes, with respective shares of 30.4% 29.2% of their revenue generated from international flights.

Source: CAAC, Company Data

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Driving Forces

China’s strong economic development, its rising middle class and the increasing disposable incomes are the main drivers of the growth of the country’s aviation industry. China is, geographically speaking, the fourth-largest country in the world, with a territory of approximately 9.6mn km2. It is also the world’s most populous country, with a population of nearly 1.4bn as of end-2018. The country’s vast territory is the reason why air transport is often the only viable option for long- distance routes across the country. The government-funded infrastructure construction boom of recent years has improved – and continues to improve – regional connectivity, and this, combined with falling air fares, is speeding up the sector’s growth.

External Increased government support for air infrastructure projects, including those which are part of the Belt and Road Initiative, is the main driver of the sector’s growth. The expansion and improvement of the country’s air transport network are accelerating the internationalisation of domestic airlines and expanding both passenger and freight traffic. China has added 42 new civil airports during the last five years, bringing their total number to 235 at the end of 2018. Since Belt and Road was launched in 2013, China has signed bilateral air transport agreements with 62 countries, and had opened direct air routes to 45 of these countries by end-2018. The Chinese government’s gradual liberalisation of the sector by allowing low-altitude flights over some cities has a positive effect on its internationalisation. China has long been a global manufacturing hub, providing a major boost for the country’s cargo traffic. Growing personal incomes make air travel increasingly popular among the Chinese, while international tourism is becoming more popular after the easing of regulations on foreign travel in recent years. According to the Ministry of Culture and Tourism, the number of China’s domestic tourists is constantly increasing, exceeding 5.5bn at the end of 2018 – a rise of 10.8% y/y – while the number of outbound tourists rose by 14.7% y/y to 149.7mn as of end-2018.

Internal The main internal driver of the sector’s development is the increasing affordability of air transport. The robust growth of low-cost carriers (LCCs) in recent years continues to drive down the cost of air tickets. This, combined with the rising number of flights and aircraft introduced by the country’s airlines, makes air transport one of the most attractive options for Chinese travellers. The rapid popularisation of mobile internet applications and the increasing digitalisation of sales brings down airlines’ fixed costs, as many of them already started to sell tickets directly to consumers without the need for intermediaries. The number of carriers introducing online booking and check-in is rising. Most of the airlines in China have frequent flyer schemes to encourage repeat purchases.

Source: CAAC, Marketline, Ministry of Culture and Tourism, DBS Bank

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Restraining Forces

Despite the increasing competitiveness of China’s aviation sector, there are still a number of factors that limit its growth. These include the increasing competition from China’s rapidly expanding high- speed rail network; the shortage of airports and pilots; and profit margins far lower than those enjoyed by Chinese airlines’ largest global competitors. Another obstacle for the sector is its extreme vulnerability to exchange rate and oil price fluctuations.

External The performance of Chinese airlines is heavily dependent on the fuel price, which is among the most significant components of their operating cost structure, accounting for about 30% of their total operating expenses in 2018. The risk of exchange rate fluctuations is another challenge – and one that is hard to predict. Air transport is also characterised by a high level of exposure to adverse weather phenomena, such as heavy rains and storms. According to the CAAC, 47.5% of all the flights that were delayed in 2018 took off late because of bad weather. Another major challenge the sector faces concerns the constraints on aviation infrastructure. Despite heavy investment in recent years, much remains to be done to make that infrastructure fit for the fastest growing aviation market in the world. While there are ongoing expansion plans for existing and new airports, the country’s busiest airports are expected to continue operating beyond their design capacity during busy hours in the short-to-medium term. Limited slot availability at China’s largest airports is the reason for the lack of an “open skies” agreement between China and the US, which entails restrictions on the number of flights between the world’s two largest aviation markets. The limited airspace available for civilian use in China is another factor which inhibits the sector’s growth. The rapid expansion of the high- speed rail network in China also has an impact on civil aviation, causing some airlines to eliminate their short routes.

Internal Chinese airlines face a shortage of pilots due to rising demand in the sector. In 2018 Boeing estimated that China’s airlines will need to add about 100,000 new pilots and 106,000 aircraft technicians by 2034. Chinese aviation education and training resources are limited and the majority of Chinese pilot trainees study overseas. China also relies on bringing in foreign pilots. With the gradual opening of China’s civil aviation market, competition among its major airlines, domestic LCCs and foreign airlines is increasing. Chinese airlines are characterised with relatively low profit margins, especially those airlines that are reliant on a single market, which makes them vulnerable to macroeconomic changes. Another serious problem concerns flight delays. Although Chinese flights' on-time rate rose to 80.1% in 2018, the highest level since 2010, there is still room for improvement.

Source: Xinhua, CAAC, China Daily

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02 SECTOR IN FOCUS

China Air Transportation Sector 2018 Q4

10% 3.2% Passenger Turnover, Freight Turnover, % y/y change % y/y change

8.4% 8.7% 0.5% Passenger Traffic, Freight Traffic, Total Air Transport y/y change y/y change Turnover, y/y change -0.9% -1.6% Passenger Load Freight Load Factor, Factor, y/y change y/y change

270.3 7.0 82.5 73.8

245.7 6.8 81.7 72.6

Passenger Turnover, Freight Turnover, Passenger Load Freight Load bn passenger-km bn tonne-km Factor, % Factor, %

Q4 2017 Q4 2018

Source: CAAC, CEIC

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Quarterly Summary

As a result of China’s and global economy slowdown, the intensifying market competition, oil price fluctuations and currency devaluation, in Q4 2018 the air transportation sector’s growth started to weaken. After global oil prices rose significantly in 2018, in Q4 2018 they slumped to their lowest level, falling by about 30% compared to their highest value in Q3 2018. As a result, in Q4 2018 the oil prices were almost flat, compared to the same period of 2017. Air ticket prices dropped at the end of 2018, which was the reason why many domestic airlines reported net losses in the last quarter of the year. In December 2018, domestic airlines’ ticket price transport index fell by 1.4% y/y. The decline came as domestic airlines’ medium distance ticket price transport index dropped by 17.1% y/y in December 2018.

According to the CAAC’s data for revenue tonne-km (RTK), in Q4 2018 the sector recorded a total air transport turnover of 31.1bn tonne-km – an increase of 8.4% over the same period of 2017. The passenger turnover reached 270.3bn passenger-km, representing an increase of 10% y/y, while freight turnover rose 3.2% to 7bn tonne-km. The airline that carried the most passengers in 2017, measured by RPK, was CSA, with 65.9bn passenger-km, followed by Air China with 55.7bn passenger-km. Air China maintained its position as the largest air freight carrier among the “Big Three”, as measured by RFTK. It carried 2.1bn tonne-km in Q4 2018, followed by CSA with almost 2bn tonne-km.

In Q4 2018, the number of passengers transported by China’s airlines rose by 8.7% y/y to 154.5mn, while freight traffic increased by 0.4% y/y to almost 2mn tonnes. Both passenger and freight load factors, however, witnessed y/y declines, with the passenger load factor falling to 81.7% versus 82.5% in Q4 2017, and the freight load factor dropping to 72.6% versus 73.8% in Q4 2017. Among the “Big Three”, in Q4 2018 Air China recorded the highest overall load factor of 71.3%, slightly higher than that of CSA (70.9%). However, Hainan Airlines performed much better than the “Big Three”, with an average overall load factor of 85.2% in Q4 2018.

Source: CAAC, CEIC, Company Data

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Sector Outlook

Comments According to the latest forecast, released by the International Air Transport Association (IATA) in March 2019, China is expected to become the world's largest civil aviation market by 2024-2025, while its air passenger volume is expected to reach 1.6bn by 2037. EMIS Insights’ forecasts that Chinese airline passenger traffic will grow at an average growth rate of 10.5% between 2019 and 2023, exceeding 1bn passengers in 2022. Passenger traffic will continue to benefit from air network expansion, driven by the growing demand for air transport. The country’s growing middle class and the increasing popularity and affordability of leisure travel will continue to be major factors behind the rising number of passengers transported by Chinese airlines. According to the Ministry of Culture and Tourism, about 150mn Chinese citizens travelled abroad in 2018 and this number is expected to reach 200mn by 2020. According to the target set by the CAAC, the number of civil airports in China is projected to reach 260 by 2020, and 370 by 2025. A new satellite terminal at Shanghai Pudong Airport and a new airport at Beijing are both due to open by the end of 2019. This infrastructure expansion is expected to ease the pressure related to slots availability.

Passenger Traffic Quarterly Forecast Passenger Traffic Annual Forecast

11.0% 12.0% 10.8% 9.8% 9.5% 9.6% 8.5% 10.5%

10.2% 176.1 175.9 1,007.7

10.0% 907.9 168.3 167.6 675.9 819.4 160.7 743.5

Q1 2019f Q2 2019f Q3 2019f Q4 2019f Q1 2020f 2019f 2020f 2021f 2022f 2023f

Passenger Traffic, mn passengers y/y change, % Passenger Traffic, mn passengers y/y change, %

Source: EMIS Insights, IATA

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Sector Outlook (cont’d)

Comments According to EMIS Insights estimates, Chinese airlines’ freight traffic is projected to increase at an average growth rate of 3.3% from 2019 to 2023, reaching 8.7mn tonnes in 2022. Considering the country’s shift towards a service-oriented economy, freight traffic is projected to grow at a slower pace in the next few years. China has long been the world’s factory with large outbound freight traffic, while the growing demand of Chinese consumers for western goods is creating an inbound freight traffic boom in the recent years. China’s imports of e-commerce goods will continue to grow further, fuelled by the rising demand coming from the growing middle class population. In 2017, the growth of China’s imports from countries associated with the Belt and Road initiative exceeded the growth of exports for the first time. The overall trade with Belt and Road countries is growing much faster than China’s overall trade and this growth will continue to drive the demand for air freight transportation in the next few years,

Freight Traffic Quarterly Forecast Freight Traffic Annual Forecast

4.0% 2.0% 3.5% 3.2% 3.0% 1.2% 1.0% 1.0% 2.6% 1.99 8.69 8.47 1.90 8.22 1.86 7.97 1.70 1.72 -0.6% 7.70

Q1 2019f Q2 2019f Q3 2019f Q4 2019f Q1 2020f 2019f 2020f 2021f 2022f 2023f

Freight Traffic, mn tonnes y/y change, % Freight Traffic, mn tonnes y/y change, %

Source: EMIS Insights

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Sector Highlights

Hainan Airlines Divestments In 2018, Hainan Airlines started a process of selling its assets in an attempt to receive finances for debt repayment. In April 2018, Hainan Airlines sold a 4% stake in Brazil’s airline Azul SA to United Continental Holdings, the parent company of the US-based United Airlines for USD 138mn. In August 2018, Hainan Airlines sold its remaining stake in Azul to a number of US institutional investors for USD 306.25mn. In October 2018, Hainan Airlines announced its plan to sell its existing stake in Lucky Air. A 60% stake in the carrier was offered to China Eastern Airlines, while the remaining 40% stake was offered to the State-Owned Assets Supervision and Administration Commission of the State Council (SASAC) of Yunnan province. In March 2019, Hainan Airlines announced that it sold a 9% stake in Portugal's flag carrier TAP Air Portugal for USD 55mn. Part of the stake was sold to the US capital fund Global Aviation Ventures LLC for USD 30m, while the rest was sold to the Brazilian airline Azul SA for USD 25m. In the end of March, 2018, Hainan Air announced that it agreed to sell its 18% stake in the budget airline Hong Kong Express Airways Ltd to Hong Kong’s largest airline Cathay Pacific Airways Ltd for USD 628mn.

Plan for Airline Relocation to Beijing’s New Airport In the beginning of January 2019, the CAAC published a plan for airline relocation to Beijing's new airport - Daxing International Airport - which is due to open in September 2019. It is designed to accommodate 72mn passengers a year by 2025 and is expected to become one of the world's busiest airports. Foreign airlines, along with airlines from Hong Kong, Macau and Taiwan, can choose which airport they want to use, with the option to operate in both, while domestic carriers, except China Postal Airlines, will have to use only one airport. The airlines which will be relocated to Beijing Daxing International Airport include China Southern, China Eastern, Beijing Capital Airlines and China United Airlines, while Air China, Hainan Airlines and Grand China Air will stay at Beijing’s current airport - Beijing Capital International Airport. Relocation will last from the winter of 2019 to the winter of 2021.

China Southern Airlines, Emirates Airlines Codeshare Agreement On January 31, 2018, China Southern Airlines (China Southern) and Emirates Airlines (Emirates) signed a codesharing agreement – a major step to boost the air connectivity in the context of the Belt and Road initiative. The codesharing on 18 routes was scheduled to be launched on March 31, 2018. In the next few years China Southern and Emirates plan to enhance their cooperation in more fields, such as air cargo and frequent traveler programmes.

Source: Xinhua, CAAC, Reuters, Financial Times

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Main Sector Indicators

Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018

Real GDP, % y/y change 6.8 6.8 6.7 6.5 6.4

GDP, Nominal, RMB bn 23,235 19,792 21,930 22,950 25,360

Consumer Price Index (CPI), Service Sector, % y/y change 103.1 102.9 102.5 102.4 102.1

Exchange Rate USD/RMB, period-end 6.53 6.29 6.62 6.88 6.86

Passenger Load Factor, %, period average 82.5 83.4 83.2 84.3 81.7

Freight Load Factor, %, period average 73.8 71.7 74.0 74.2 72.6

Passenger Traffic, mn passengers 142.1 146.3 150.3 160.6 154.5

Domestic* 128.1 130.8 134.6 144.0 138.6

International 14.0 15.5 15.6 16.6 15.9

Freight Traffic, thou tonnes 1,961 1,710 1,845 1,861 1,969

Domestic* 1,326 1,170 1,224 1,245 1,319

International 635 540 621 616 650

Total Air Transport Turnover, bn tonne-km 28.6 28.5 29.9 31.2 31.1

Domestic* 18.2 18.5 19.0 19.9 19.8

International 10.4 10.0 10.9 11.3 11.2

Passenger Turnover, bn passenger-km 245.7 258.0 261.6 281.3 270.3

Domestic* 182.5 190.6 192.2 206.0 200.2

International 63.2 67.4 69.4 75.3 70.2

Freight Turnover, mn tonne-km 6,800 5,910 6,640 6,670 7,030

Domestic* 1,990 1,780 1,870 1,890 2,010

International 4,810 4,130 4,770 4,780 5,020

* Including Hong Kong, Taiwan and Macau Source: CAAC, CEIC

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Main Sector Indicators (cont’d)

Comments Air Transport Turnover, bn tonne-km

In the last quarter of 2018, the sector’s total air 31.2 31.1 transport turnover, measured by RTK, rose by 28.6 28.5 29.9 11.3 11.2 8.4% y/y to 31.1bn tonne-km. Air transport 10.4 10.0 10.9 turnover on domestic routes increased by 8.7% y/y to 19.8bn tonne-km, of which Hong Kong, 19.9 19.8 Macao and Taiwan routes accounted for 0.5bn 18.2 18.5 19.0 tonne-km, up by 4.3% y/y. International routes registered a transport turnover of 11.2bn tonne- Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 km, an increase of 7.8% y/y. Domestic* International Total In this period, the sector witnessed a 10% y/y Passenger Turnover, bn passenger-km increase in passenger turnover, which reached 270.3bn passenger-km. Air passenger turnover on 281.3 270.3 245.7 258.0 261.6 domestic routes totalled 200bn passenger-km, up 75.3 70.2 63.2 67.4 69.4 by 9.7% y/y, while that on international routes reached 70.2bn passenger-km, up by 11.1% y/y. 182.5 190.6 192.2 206.0 200.2 In Q4 2018, freight turnover rose by 3.2% y/y to 7,030mn tonne-km, including 5,020mn tonne-km on international routes and 2,010mn tonne-km on Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 domestic routes, up by 4.4% y/y and 1% y/y, Domestic* International Total respectively. Freight Turnover , mn tonne-km

7,030 6,800 6,640 6,670 5,910 1,990 1,870 1,890 2,010 1,780

5,020 4,810 4,130 4,770 4,780

Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018

International Domestic* Total

Source: CAAC, CEIC

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Main Sector Indicators (cont’d)

Comments Passenger Traffic, mn passengers

In Q4 2018, China’s airlines witnessed a 8.7% y/y 160.6 154.5 increase in passenger traffic. A total of 154.5mn 142.1 146.3 150.3 16.6 15.9 passengers were transported by domestic 14.0 15.5 15.6 airlines, including 138.6mn domestic passengers and 15.9mn international passengers, 128.1 130.8 134.6 144.0 138.6 representing y/y increases of 8.2% and 13.9%, respectively. Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 In Q4 2018, China’s airlines transported 1.97mn Domestic* International Total tonnes of freight, marking a slight increase of 0.4% y/y. The positive growth was supported by Freight Traffic, thou tonnes the 2.4% y/y increase in the international freight traffic volume, which reached 650,000 tonnes, 1,961 1,969 while the domestic freight traffic volume dropped 1,845 1,861 1,710 635 616 650 by 0.5% y/y to 1.32mn tonnes, as a result of the 540 621 Chinese economy’s weaker growth in the last quarter of 2018. 1,326 1,170 1,224 1,245 1,319 During Q4 2018 passenger load factor and freight load factor fell to an average of 81.7% and 72.6%, Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 down by 0.8 pp and 1.2 pp, respectively. Domestic* International Total

Load Factor, %, period average 84.3 83.4 83.2 82.5 81.7 74.2 74.0 73.8 72.6 71.7

Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018

Passenger Load Factor Freight Load Factor

Source: CAAC, CEIC

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Top M&A Deals

Top M&A Deals in China’s Air Transport Sector, Q1 2018 – Q1 2019

Date of Country of Deal Value Target Company Deal Type Buyer Stake % Announcement Buyer USD (mn)

01-Mar-18 China Express Airlines Co Ltd IPO Institutional Investor(s) n/a 132.1 10.1

Undisclosed institutional investor(s); 09-Jun-18 Hainan Airlines Holding Co Ltd Minority Stake Singapore 1097.8 11.8 Temasek Fullerton Alpha Pte Ltd

JuneYao Group; Juneyao Airlines Co 10-Jul-18 China Eastern Airlines Corp Ltd Minority Stake Ltd; China Structural Reform Fund Corp China 1782.0 10.1 Ltd

Huaxia Jiuzhou General Aviation 12-Jul-18 Minority Stake Jiangxi Changyun Co Ltd China 10.8 36.0 Co Ltd

10-Aug-18 Azul SA Minority Stake institutional investors United States 306.3 19.4

China National Aviation Capital Holding 31-Aug-18 Air China Cargo Co Ltd Acquisition 356.6 100.0 Co Ltd

Guangdong Anshunda Supply Zhuhai Ganfu Investment Management 23-Oct-18 Minority Stake China 3.4 20.0 Chain Management Co Ltd Partnership (Limited Partnership)

21-Nov-18 Urumqi Airlines Co Ltd Minority Stake Urumqi Municipal Government China n/a 40.0

13-Nov-18 Juneyao Airlines Co Ltd Minority Stake China Eastern Airlines Corp Ltd China 452.9 8.6

Zhenjiang Baohua Logistics Co Milkyway Chemical Supply Chain 06-Dec-18 Acquisition China 21.2 82.0 Ltd Service Co Ltd

Mount Morning Capital; China Broadband Capital Partners; Hopu Investment Management Co Ltd; Total Hong Kong; Beijing Waytung IOT Technology 10-Dec-18 Minority Stake China; Singapore; 320.0 n/a Co Ltd Energy Ventures; Tencent Holdings Ltd; Bank of China Group Investment Ltd; TH France; Malaysia Capital; Global Logistic Properties Pte Ltd; Intelligent Fund of Funds

28-Dec-18 China Southern Airlines Co Ltd Minority Stake Qatar Airways Ltd Qatar n/a 5.0

China Xinhua Airlines Group Co 13-Dec-18 Minority Stake Hainan Airlines Holding Co Ltd China 227.2 12.2 Ltd

27-Mar-19 Hong Kong Express Airways Ltd Acquisition Cathay Pacific Airways Ltd Hong Kong 628.1 100.0

Source: EMIS DealWatch

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M&A Activity, Q1 2018 – Q1 2019

Number and Value of Deals Deals by Type

Acquisition 21% 4 2,456 1 1 1 Minority Stake

1,025 IPO 7% 1,098 132 628 Purchase 71% Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019

Value of Deals , USD mn Number of Deals

Deals by Country of Investors Deals by Deal Value

0-50mn 25%

Others 38%

1,000.1- China 62% 100.1- 10,000mn 1,000mn 17% 58%

Source: EMIS DealWatch

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03 COMPETITIVE LANDSCAPE

1949 Development Milestones Timeline The Civil Aviation Administration of China (CAAC) is established under the People's Liberation Army China Airlines Air Force.

Development Milestones 1980 1988 Market Players The CAAC becomes independent from the Air Force and is placed under the direct The air transport operations of the CAAC are split administration of the State Council. into six independent airlines, namely Air China. China Eastern, China Northwest, China Northeast, China Southwest and China Southern.

Market Players The CAAC launches an airport localisation 1989 programme, according to which the ownership and management of China's airports is to be transferred Hainan Provincial Airline, the predecessor of to local governments. the largest private airline in China - Hainan Airlines – is established. Development Milestones

1994 Development Milestones Market Players 2002 China allows foreign investment in its Following the restructuring of the airlines and air aviation sector. services, China's "Big Three" airlines are formed: Air China, China Southern and China Eastern. 2003 Development Milestones The CAAC completes the airport localisation programme, transferring all airports in China, except those in Beijing and Tibet, to local Market Players 2004 governments China's largest low-cost airline, Spring Airlines, is established. 2005 Development Milestones China opens its aviation sector for domestic 2008 Market Players private investment. China's government establishes COMAC to construct passenger aircraft, in an effort to reduce the country's dependency on Boeing and Airbus 2009 Market Players Airbus opens its first factory outside Europe in Tianjin, to produce narrow-body aircraft for the 2017 Market Players Asian market.

Boeing starts the construction of its first factory in China, where it will assemble Boeing 737s in a joint Development Milestones venture with COMAC. 2018 The CAAC liberalises airfares on most of major China's C919 narrow-body twinjet, developed by domestic routes and allows more than one COMAC, is introduced and makes its maiden flight. airline to operate international routes from China to major international destinations. Development Milestones

Source: CAAC, MOFCOM, Chinese Academy of Sciences, Xinhua, Company Data

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Highlights

Overview China’s aviation sector is dominated by China’s four largest carriers – namely China Southern Airlines (CSA), Air China, China Eastern Airlines (CEA) and Hainan Airlines – which between them control about 80% of the market in terms of total RTK. They face little competition from foreign carriers due to airport capacity limits and airspace restrictions. Overseas carriers often enter into codeshare agreements with China’s major airlines. According to the CAAC, China had a total of 60 airlines at the end of 2018, including 45 state-controlled and 15 privately-owned.

Market Structure Most of the airlines in China are full-service carriers, while low-cost carriers (LCCs) have a limited presence in China compared with other well-established aviation markets, such as the US, Europe and South Asia. According to a publication from the Japan-based newspaper Nikkei Asian Review, in 2018 the market share of LCCs in China was 14%. According to the estimates of Boeing, their share is expected to rise to 35% by 2035. To meet rising demand for budget air travel, some full-service carriers have entered the low-cost market by establishing subsidiaries. China’s LLCs mainly operate short-haul flights, however, some of them are thinking about entering the long-haul segment, which is expected to intensify competition in the sector. In June 2017, Lucky Air launched its Kunming- Moscow route, becoming the fist LCC to enter the long-haul segment.

Main Players China’s “Big Three” airlines – CSA, Air China and CEA – are state-holding enterprises (SHEs), while Hainan Air is China’s largest private airline. Competition among them is not very intense, as they focus on different regions. Beijing is the core hub for CSA, Air China and Hainan Airlines, while the main hub of CEA is Shanghai. Air China also has a main hub in Chengdu, CSA in Guangzhou, CEA in Kunming, and Hainan Airlines in Haikou. CEA and Hainan Airlines also operate in the low-cost segment via their subsidiaries. Hainan Airlines’ subsidiary Lucky Air is the second-largest LCC in China, while the subsidiary of CEA – China United Airlines – is the third-largest in terms of revenue. The largest LCC is the Shanghai-based Spring Airlines, which was also the first LCC in the country, established in 2004. China’s LCCs are mainly focused on the country’s second- and third-tier cities via point-to-point networks. Most of the international routes in the country are served by Air China. According to IATA about 95% of China’s long-haul international routes were given to a single operator, while among China’s ten most-popular international long-haul routes, only four had more than one carrier.

Source: CAAC, Company Data, MarketLine, Nikkei Asian Review

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Main Players

Top Companies by Revenue, 2018

Rank Company Sales Revenue, RMB mn

1 China Southern Airlines Co Ltd 143,623 2 Air China Ltd 136,774 3 China Eastern Airlines Corp Ltd 114,930 4 Hainan Airlines Holding Co Ltd 67,764 5 Shandong Airlines Co Ltd 18,766 6 Juneyao Airlines Co Ltd 14,366 7 Spring Airlines Co Ltd 13,114 8 Cts International Logistics Corp Ltd 8,715* 9 China Express Airlines Co Ltd 4,260 10 Citic Offshore Helicopter Co Ltd 1,426

Top Listed Companies by Revenue, 2018

Rank Company Sales Revenue, RMB mn

1 China Southern Airlines Co Ltd 143,623 2 Air China Ltd 136,774

3 China Eastern Airlines Corp Ltd 114,930 4 Hainan Airlines Holding Co Ltd 67,764 5 Shenzhen Airlines Co Ltd 23,910*

6 Xiamen Airlines Co Ltd 22,671* 7 Shandong Airlines Co Ltd 18,766 8 Juneyao Airlines Co Ltd 14,366

9 Spring Airlines 13,114 10 Shanghai Airlines Co Ltd 12,146*

* Data for 2017. Source: EMIS Company Database

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04 COMPANIES IN FOCUS

China Southern Airlines Co Ltd

Quarterly Update In the last quarter of 2018, the operating revenue of China Southern Airlines Co Ltd (CSA) amounted to RMB 34.7bn, representing an increase of 9.7% y/y, while its operating cost rose by 12.5% y/y to RMB 34.5bn. In Q4 2018, CSA witnessed a net loss of RMB 1.4bn, compared to a net loss of RMB 1.3bn in Q4 2017. Its performance was dragged down by high operational costs and exchange rate losses.

In Q4 2018, CSA carried 35.3mn passengers, representing an increase of 8.8% y/y. Passenger capacity, measured by available seat-kilometers (ASK), increased by 11.8% to 81bn, while the overall passenger traffic, measured by RPK increased by 10.9% to 65.9bn passenger-km. The overall capacity of CSA, measured by available tonne-kilometers (ATK), was 11.1bn, representing a y/y increase of 12%. Its total annual traffic volume, measured by RTK, rose by 3.3% y/y to 10.6bn tonne-km.

On December 28, 2018, it was announced that Doha-based passenger and cargo air transportation company Qatar Airways Ltd acquired a 5% stake in CSA. Qatar Airways purchased a total of 613,360,166 shares in CSA, including 430,036,166 A shares and 183,324,000 H shares, listed on Shanghai Stock Exchange and on Hong Kong Stock Exchange, respectively.

Income Statement, RMB mn

2,862 2,452 30,946 33,454 41,334 34,734 34,475 34,101 34,024 31,673 30,646

29,168 -457

-1,377 -1,401

Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018

Operating Revenue Operating Cost Net Profit

Source: Company Data, EMIS DealWatch

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China Southern Airlines Co Ltd (cont’d)

Highlights In 2018, the revenue of CSA totalled RMB 143.6bn, representing an increase of 9.7% y/y. The company’s net profit, however, declined to RMB 3.5bn, showing a significant decline of 49.4% y/y, mainly due to the company’s rising operating cost, as a result of the increase in traffic volume. Total operating expenses as a percentage of total operating revenue increased from 96.3% in 2017 to 97.7% in 2018. According to the company, the RMB depreciation against the USD was another factor behind the falling profits in 2018.

In 2018 CSA introduced 104 new aircraft, while 18 old aircraft were retired. It carried 139.9mn passengers, up by 10.8% y/y, with a load factor of 82.4%, compared with 82.2% in 2017. In 2018 CSA’s air passenger traffic increased by 12.4% y/y to 259.bbn RPK, while its total air traffic rose to 30.3bn RTK, up by 11% y/y.

In 2018, CSA achieved safe flight of 2.8mn hours, up by 8% over 2017. The number of flights carried out by CSA reached 1,069,430, an increase of 8% over 2017.

Income Statement, RMB mn Balance Sheet, RMB mn

5.42

19.9% 19.4% 4.39

15.4% 3.60 119,446 109,072 82,389 143,623 195,573 127,806 53,656 172,316 114,803 154,420 39,214 24,857 33,889 22,901 22,055 6,833 5,889 3,456

2016 2017 2018 2016 2017 2018

Operating Revenue EBITDA Total Assets Shareholders Equity Net Profit EBITDA Margin Net Debt Net Debt / EBITDA

Source: Company Data

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China Southern Airlines Co Ltd (cont’d)

Company Background Operating Revenue by Segment, 2018

China Southern Airlines Co Ltd (CSA) was founded in 1988, following the restructuring of the CAAC, Passenger which was split into six separate airlines. Traffic 90.7% Headquartered in Guangzhou, it has 16 branches in China and six majority-owned civil aviation subsidiaries, namely Xiamen Airlines, Shantou Airlines, Zhuhai Airlines, Guizhou Airlines, Cargo and Mail Traffic Chongqing Airlines and Henan Airlines. 7.1%

In 2012, CSA launched the Canton Route, connecting its Guangzhou hub with Europe, Asia and Australia. As of end-2018, CSA operated more Others 2.2% than 3,000 flights daily to over 224 destinations in 40 countries. It has shared codes with 31 international and domestic airlines, such as Air France, KLM Royal Dutch Airlines, American Airlines, Qantas Airways, and Finnair in 790 Total Revenue by Region, 2018 routes.

CSA was China’s biggest airline by number of passengers and fleet size in 2018. At the end of 2018, the carrier’s fleet consisted of 840 passenger and cargo aircraft, ranking first in Asia International and third worldwide in terms of fleet size. 26.8%

Passenger traffic operations accounted for 90.7% of CSA’s total revenue in 2018, while cargo and mail traffic had a share of 7.1%. Domestic 71.4% In 2018, CSA was named the World’s Most Hong Kong, Improved Airline by the global airline quality Macau and Taiwan 1.8% programme Skytrax. Its rating moved up nine places to 14th among the world’s top 100 airlines, entering the top 20 for the first time.

Source: Company Data, IATA

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Air China Ltd

Quarterly Update During the last quarter of 2018, Air China witnessed a positive performance, despite negative factors, such as oil price fluctuations and currency depreciation. In this period, its operating revenue totalled RMB 33.9bn, an increase of 14.6% y/y, while its net profit reached RMB 577mn, compared with a net loss of more than RMB 1bn registered in the same period of 2017.

In Q4 2018, the number of passengers carried by Air China rose to 27.8mn, up by 6% y/y. Passenger capacity, measured by ASK, increased by 8.1% to 69.8bn, while the overall passenger traffic, measured by RPK increased by 6.6% to 55.7bn passenger-km. Air China’s overall capacity, measured by ATK, was 10.1bn, representing a y/y increase of 3.4%. Its total annual traffic volume, measured by RTK, rose by 5.2% y/y to 7.1bn tonne-km.

On December 28, 2018, Air China announced that it sold its 51% stake in Air China Cargo Co Ltd to Aviation Capital Holding Co Ltd (AVIC Capital Co Ltd) for RMB 2.4bn.

Income Statement, RMB mn

3,729 3,178

719 577 38,638 27,399 31,607 29,817 29,581 27,649 26,603 32,635 33,894 31,063 -1,055

Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018

Operating Revenue Operating Cost Net Profit

Source: Company Data

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Air China Ltd (cont’d)

Highlights In 2018, the revenue of Air China amounted to RMB 136.8bn, an increase of 12.7% y/y that resulted mainly from higher traffic volume and an increased number of aircraft. In 2018 Air China introduced 50 new aircraft and phased out 21 aircraft.

In 2018, the company’s air traffic revenue reached RMB 131.8bn, representing an increase of 12.7% y/y. It includes air passenger revenue, which totalled RMB 120.4bn in 2018, and air cargo and mail revenue, which amounted to RMB 11.4bn in 2018. Other operating revenue amounted to RMB 1.6bn, representing an increase of 19.5% over 2017. This category includes the revenues from aircraft engineering, ground services and other airline-related services.

In 2018, the number of passengers carried by Air China increased by 8% y/y to 110mn, with a load factor of 80.6% compared to 81.1% in 2017. Passenger capacity, measured by ASK, increased by 10.4% to 273.6bn, while the overall passenger traffic, measured by RPK increased by 9.67% to 220.5bn. Air China’s overall capacity, measured by ATK, was 38.9bn, representing a y/y increase of 9.1%. Its total annual traffic volume, measured by RTK, rose by 8.4% y/y to 27.5bn tonne-km.

Income Statement, RMB mn Balance Sheet, RMB mn

23.3% 3.67

22.1%

3.23 20.2% 3.15 122,677 121,363 224,128 28,316 27,098 243,716 27,566 136,774 235,718 99,356 94,932 8,637 100,557 8,203 7,764 89,236 88,991 76,474

2016 2017 2018 2016 2017 2018 Operating Revenue EBITDA Total Assets Shareholders Equity Net Profit EBITDA Margin Net Debt Net Debt / EBITDA

Source: Company Data

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Air China Ltd (cont’d)

Company Background Revenue by Segment, 2018

Air China Ltd was established in 1988 as a result of the CAAC restructuring. The carrier took over Passenger Traffic 90.3% the long-haul aircraft of CAAC to handle China’s intercontinental flights. In 2001 Air China merged with China Southwest Airlines to become the second-largest airline in China in terms of fleet and number of passengers. It was listed on the

Hong Kong and London stock exchanges in 2004. Cargo and In 2007 Air China joined Star Alliance, one of the Mail Traffic 8.6% largest airline alliances globally. Air China is headquartered in Beijing, which is one of its Others 1.2% major hubs, along with Chengdu, Shanghai and Shenzhen. Air China holds majority stakes in Air China Cargo Co Ltd, Shenzhen Airlines Co Ltd, Air Macau Co Ltd, Beijing Airlines Co Ltd, Dalian Airlines Co Ltd, Air China Inner Mongolia Co Ltd, Aircraft Maintenance and Engineering Revenue by Region, 2018 Corporation Co Ltd (AMECO), and China National Europe 9.2% Aviation Fuel Group Corp Ltd (CNAF). It also owns North 29.99% of Hong Kong’s Cathay Pacific Airways Ltd America and 22.8% of Shandong Airlines Co Ltd. 6.7% Asia Pacific As of end-2018, Air China had a total of 669 and Others aircraft, operating 754 passenger routes, 7.6% including 138 international routes, 27 regional routes and 589 domestic routes. Through Japan and Korea 5.7% cooperation with Star Alliance members, Air China covered 1,317 destinations in 193 countries.

In 2017, Air China formally commenced its Mainland Hong Kong, China 66.1% Macau and cooperation with Germany’s Lufthansa Group on Taiwan 4.7% joint operation of China-Europe routes.

Source: Company Data

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China Eastern Airlines Corp Ltd

Quarterly Update In Q4 2018, China Eastern Airlines (CEA) reported an 11.7% y/y growth in operating revenue, which amounted to RMB 27.1bn. In this period the company saw a net loss of nearly RMB 2bn versus RMB 1.7bn net loss reported in Q4 2017.

In Q4 2018, the number of passengers carried by CEA was 30.6mn, up by 8.3% y/y. Passenger capacity, measured by ASK, increased by 8.7% to 62.8bn, while the overall passenger traffic, measured by RPK, was 55.5bn passenger-km, up by 9.4% y/y. The company’s overall capacity, measured by ATK, was 7.8bn, representing a y/y increase of 11.4%. Its total annual traffic volume, measured by RTK, grew by 8% y/y to 5.2bn tonne-km.

On November 13, 2018, CEA announced that it will acquire an 8.6% stake of its rival Juneyao Airlines Co Ltd for RMB 3.2bn. Upon deal completion, CEA will become Juneyao’s second-largest shareholder.

Income Statement, RMB mn

2,432 2,158

348 33,456 27,052 24,642 24,216 27,988 27,669 26,753 26,630 24,226 23,563 -1,676 -1,997

Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018

Operating Revenue Operating Cost Net Profit

Source: Company Data

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China Eastern Airlines Corp Ltd (cont’d)

Highlights In 2018, the revenue of CEA increased by 13% y/y to RMB 114.9bn, while its net profit shrank by 56.9% y/y to RMB 2.9bn. It introduced 67 aircraft in that year, while 14 aircraft were retired.

In 2018, the company’s air traffic revenue increased by 13.5% y/y to RMB 109.8bn, including RMB 104bn from air passenger traffic, RMB 3.6bn from air cargo and mail traffic, and RMB 2.2bn from other air traffic. Other operating revenue reached RMB 5.1bn, representing an increase of 3.5% over 2017.

In 2018, CEA achieved total annual traffic volume of 20.3bn tonne-km, representing an increase of 7.7% y/y, and carried 121.2mn passengers, up by 9.4% y/y. Its passenger traffic volume rose by 9.7% to 200.9bn passenger-km. CEA’s passenger capacity, measured by ASK, increased by 8.1% to 224.3bn, while its overall capacity, measured by ATK, was 30bn, representing a y/y increase of 9.5%.

In 2018, CEA clocked up nearly 2.2mn safe flying hours in total, an increase of 6.6% y/y. Its fleet carried out 930,100 flights, a rise of 6% over 2017.

Income Statement, RMB mn Balance Sheet, RMB mn

30.1% 5.76

25.0% 5.33 227,464 236,765 67,764 210,051

59,904 4.89 6,333 14,948 12,263 40,678 131,933 9.3% 126,053 116,078 3,882 3,410 56,518 59,352 50,096

2016 2017 2018 3,648

2016 2017 2018 - Operating Revenue EBITDA Total Assets Shareholders Equity Net Profit EBITDA Margin Net Debt Net Debt / EBITDA

Source: Company Data

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China Eastern Airlines Corp Ltd (cont’d)

Company Background Air Traffic Revenue by Segment, 2018

China Eastern Airlines Corp Ltd (CEA) originated from the first squadron established by the former Passenger Traffic 94.7% Civil Aviation Administration of Shanghai in 1957. It was officially incorporated in 1988, following the CAAC restructuring. In 1997 CEA acquired China General Aviation Corporation (CGAC) and was listed on the New York, Hong Kong and Shanghai stock exchanges in the same year. In 1998 it founded China Cargo Airlines Ltd in a joint venture with China Ocean Shipping Company Others 2.0% (COSCO). In 2001 it acquired Great Wall Airlines, Cargo and while in 2003 it merged with China Yunnan Mail Traffic 3.3% Airlines and China Northwest Airlines.

CEA is headquartered in Shanghai – China’s largest aviation hub with more than 130mn passengers in 2017. While Shanghai is the core hub of CEA, Kunming and Xi’an are its major Air Passenger Traffic Revenue by Region, regional hubs. In 2017 CEA started to build a new 2018 facility at the new Beijing airport, scheduled to open in 2019, where it will be the main airline International 30.4% handling 40% of the traffic flow.

As of end-2018, CEA operated a fleet of 692 aircraft, including 12 business aircraft held under trust. The average fleet age of 5.7 years for its major models ranks CEA’s among the youngest fleets operated by the world’s large-size international airlines. CEA has been a member of Domestic 66.0% Skyteam Alliance since 2011, with its flight Regional (Hong Kong, network covering 175 countries and 1,150 Macau and Taiwan) destinations at the end of 2018. 3.7%

Source: Company Data

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Hainan Airlines Holding Co Ltd

Quarterly Update In Q4 2018, the revenue of Hainan Airlines Holding Co Ltd (Hainan Airlines) rose by 4.7% y/y to RMB 15.4bn, as a result of the increase in the number of flights, passengers and freight carried. In this period, it saw a significant net loss of RMB 4.4bn, compared with a net profit of RMB 0.6bn in Q4 2017.

In this period Hainan Airlines carried 20mn passengers, up by 7% y/y. Passenger capacity, measured by ASK, rose by 13.8% to 42.2bn, while the overall passenger traffic reached 34.7bn passenger-km, up by 10.6% y/y. The company’s overall capacity increased by 11.5% y/y to 4.2bn available tonne-km. Its total annual traffic volume, measured by RTK, grew by 12% y/y to 3.6bn tonne-km.

On November 21, 2018, Hainan Airlines announced that it will transfer 40% in LCC Urumqi Airlines Co Ltd (Urumqi Air) to the Urumqi Municipal Government. Prior the deal, Urumqi Municipal Government had a 30% stake in Urumqi Air. Upon completion of the deal, Hainan Airlines will still hold the remaining 30% stake in Urumqi Air.

On December 13, 2018, Hainan Airlines announced the acquisition of an additional 12.18% stake in the air passenger and cargo carrier China Xinhua Airlines Group Co Ltd, for RMB 1.6bn. Upon deal completion, Hainan Airlines' stake ownership in China Xinhua Airlines will increase to 73.92%.

Income Statement, RMB mn

1,371 562 162

-761 19,414 17,042 16,809 16,357 16,132 15,409 14,859 14,722 14,558 14,220

-4,420

Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018

Operating Revenue Operating Cost Net Profit

Source: Company Data, EMIS DealWatch

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Hainan Airlines Holding Co Ltd (cont’d)

Highlights In 2018, the revenue of Hainan Airlines reached RMB 67.8bn, an increase of 13.1% y/y. The revenue from air transport operations totalled RMB 64.3bn, up by 13.6% y/y. The y/y growth in revenue came as the company expanded its aircraft fleet, increasing the number of flights and routes. In 2018 Hainan Airlines suffered a net loss of RMB 3.6bn, which it attributed to asset devaluation, unplaced government subsidies and lower investment gains.

In 2018 Hainan Airlines has opened 62 new international and regional routes, among them 44 were long-haul routes. It completed 1.4mn flying hours in 2018, up by 11.2% y/y, while the number of flights reached 579,300, an increase of 7.5% y/y.

Income Statement, RMB mn Balance Sheet, RMB mn

12.63

30.1%

25.0% 197,348 204,735

67,764 4.48 59,904

6,333 3.58 148,144 14,948 12,263 40,678 9.3% 79,967 73,957 3,882 3,410 68,750 67,007 67,876 43,903

2016 2017 2018

2016 2017 2018 3,648 -

Operating Revenue EBITDA Total Assets Shareholders Equity Net Profit EBITDA Margin Net Debt Net Debt / EBITDA

Source: Company Data

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Hainan Airlines Holding Co Ltd (cont’d)

Company Background Revenue by Segment, 2018

The predecessor of Hainan Airlines Co Ltd –

Hainan Province Airlines – was established in Passenger 1989. In 1993 it was restructured, becoming Traffic 96.7% China's first joint-stock airline, and started to provide scheduled services in the same year. In 1996 it was renamed Hainan Airlines. In 1998, it became the first Chinese airline to own shares in an airport, after it acquired a 25% stake in Haikou Meilan International Airport, which is its major Cargo, Mail and Extra hub. Hainan Airlines owns controlling shares in Luggage Shanxi Airlines Co Ltd, Chang’An Airlines Co Ltd, Traffic 3.0% China Xinhua Airlines Co Ltd, Fuzhou Airlines Co Others 0.2% Ltd, Tianjin Airlines Co Ltd and Guangxi Beibu Gulf Airlines Co Ltd.

Hainan Airlines is headquartered in Haikou – the capital of the Hainan province – which is its main Revenue by Region, 2018 hub. Its second major hub is located at the Beijing Capital Airport. As of end-2018, Hainan Airlines had a total of 463 aircraft, operating more than 2,000 routes, including 244 Domestic international routes and 1,800 domestic and 80.2% regional routes. Its flight network covered 63 cities worldwide.

In 2017, Skytrax awarded Hainan Airlines five-star airline rating for the quality of airport and onboard product services for the seventh consecutive year. It is the only carrier in China, International 19.8% and one of the few worldwide, to be certified with a five-star rating by Skytrax.

Source: Company Data

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Shandong Airlines Co Ltd

Quarterly Update In the last quarter of 2018, the operating revenue of Shandong Airlines exceeded RMB 4.3bn, representing an increase of 10.2% y/y, while its operating cost rose by 17.2% y/y to RMB 4.6bn. As a result of the increasing competition and falling air ticket prices, the company witnessed a net loss of RMB 469.2mn, compared with a net loss of RMB 261.8mn in Q4 2017. In 2018, the net profit of Shandong Airlines hit its lowest level since 2014.

On October 10, 2018 Shandong Airlines announced its flight plan for the winter 2018 – spring 2019 period. It opened 11 routes originating from Beijing, Qingdao, Guiyang, Urumqi, Xiamen and other cities in China for the period from October 28, 2018 to March 30, 2019.

Income Statement, RMB mn

613

249

-45 3,925 3,923 5,716 4,321 4,599 4,549 4,496

-262 3,998 4,233 4,023

-469

Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018

Operating Revenue Operating Cost Net Profit

Source: Company Data, Xinhua

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Shandong Airlines Co Ltd (cont’d)

Highlights In 2018, the revenue of Shandong Airlines went up by 13.8% y/y to almost RMB 18.8bn. The company’s main segment – air transport services – marked a 13% y/y growth in revenues, which exceeded RMB 18bn. It had a share of 96.2% in the company’s total revenue, the remaining 3.8% generated by the “other services” segment, which included logistics freight services, hotel and catering services, food processing and delivery services, aircraft maintenance, civil aviation personnel training and others. In 2018 the revenue from other services marked a sizable increase of 41.8% y/y to RMB 704.7mn.

In 2018, the company’s net profit slumped to RMB 347.4, down by 29.2% y/y, which it attributes to the rising fuel costs. In 2018 Shandong Airlines reported a total traffic volume of 3.5bn tonne-km, an increase of 11.1% y/y, while the passenger traffic volume rose by 11.7% to 36.9bn passenger-km. It carried a total of 25.5mn passengers, up by 9.9% y/y, with a passenger load factor of 83.9%, up by 0.75 pp y/y. The passenger capacity of Shandong Airlines, measured by ASK, increased by 10.7% y/y to 43.9bn, while its overall capacity, measured by ATK, was 4.7bn, an increase of 10.2% y/y. In 2018, Shandong Airlines introduced a total of 13 aircraft, while four aircraft were retired. The company achieved 434,100 hours of safe flight and 205,800 flights, increases of 8.1% y/y and 6.1% y/y, respectively.

Income Statement, RMB mn Balance Sheet, RMB mn

4.1% 4.61 3.9%

3.52

2.4% 18,766 2.02 16,564 16,485 12,742 13,742 13,351 2,091 1,999 1,297 642 568 533 490 454 347 4,471 4,253 3,836

2016 2017 2018 2016 2017 2018

Operating Revenue EBITDA Total Assets Shareholders Equity Net Profit EBITDA Margin Net Debt Net Debt / EBITDA

Source: Company Data

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Shandong Airlines Co Ltd (cont’d)

Company Background Revenue by Segment, 2018

Shandong Airlines Co Ltd was established in 1994 Air Transport by nine shareholders, including Air China Ltd and Services Shandong Finance Investment Group Co Ltd. In 96.2% 1997 it founded the Xinxing (New Star) Aviation Alliance together with four other Chinese carriers, namely Shenzhen Airlines, Chengdu Airlines, Wuhan Airlines and Zhongyuan Airlines.

The company’s two largest shareholders are Shandong Aviation Group Co Ltd and Air China Ltd with stakes of 42% and 22.8% respectively as of Other end-2018. Shandong Airlines is headquartered in Services Jinan, which is its major hub. It also has branch 3.8% offices and flight bases in Qingdao, Yantai, Xiamen, Chongqing, Beijing, Urumqi and Guiyang.

As of the end of 2018, the company had 122 aircraft in total, with an average age of 5.3 years, Revenue by Region, 2018 placing Shandong Airlines among the carriers with the youngest fleets in China. In 2018 the Domestic company operated more than 200 domestic, 90.68% international and regional air routes and more than 3,700 flights weekly. Its routes included about 80 large and medium-sized cities in China and regional routes to Hong Kong and Taiwan, as well as international routes to South Korea, Japan, Thailand, Cambodia and India.

International 7.84% Regional 1.48%

Source: Company Data

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05 REGULATORY ENVIRONMENT

Government Policy

Regulatory Bodies China’s aviation sector is heavily regulated by the government. However, there is a trend towards deregulation with the ongoing reform in the sector. The Civil Aviation Administration of China (CAAC) is the major regulatory body, formulating the sector’s overall development strategy and civil aviation- related laws, regulations and standards. It conducts certification, supervision and inspection of civil aircraft operators and manages the construction and safe operation of civil airports in China. The CAAC formulates civil aviation pricing policies and oversees their implementation. It also approves applications for the purchase and lease of civil aircraft and applications for new routes. The CAAC is responsible for negotiating bilateral air service agreements between China and other countries.

Civil Aviation System Reform Programme The Civil Aviation System Reform Programme, approved in 2012, removed the CAAC’s control over the commercial operations of air carriers and other aviation-related companies. China’s nine CAAC- controlled airlines were consolidated into the “Big Three” – Air China, China Southern Airlines and China Eastern Airlines. Additionally, the transfer of ownership of all civil airports, except for those in Beijing and Tibet, to local governments was completed in 2003. In 2006 the CAAC released Guidelines on Deepening the Civil Aviation Reform, targeting the removal of control over operation rights on all domestic routes. China’s airlines no longer needed an approval from the CAAC to fly on domestic routes, except for certain routes that needed to be reported to the CAAC. The document encouraged Chinese airlines to join global airline alliances to expand their networks.

Airfare Liberalisation Reform China’s airfare liberalisation reform, first launched in 2004, aimed to improve air service quality and support healthy competition among domestic airlines. In 2004 the CAAC promulgated the Scheme of Domestic Airfare Reform, which set a benchmark price of RMB 0.75 per km and fixed a price range for domestic airfares. The reform was not very successful, with many airlines ignoring the price floor limits, which led the government to abolish the scheme. The CAAC relaxed airfare restrictions on 31 domestic routes in 2013 and on another 101 in 2015. In December 2017 the CAAC lifted the airfare restrictions on 306 routes, including the country’s busiest and most profitable ones, such as the Beijing-Shanghai route. Price increases of no more than 10% per year are allowed on domestic routes that have at least five carriers competing. At the end of 2017, the total number of liberalised routes reached 1,030, which is about one fourth of all air routes, according to the CAAC.

Source: CAAC, American Society of Transportation and Logistics, Chinese Academy of Sciences, MOFCOM, Reuters, Xinhua

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Government Policy (cont’d)

ASEAN-China Air Transport Agreement The ASEAN Single Aviation Market (ASAM) was first proposed in 2007 to liberalise the air transportation sector throughout ASEAN’s ten member countries. It came into effect only in April 2016, Indonesia and Laos being the last countries to ratify the ASAM. In 2010 Air Transport Agreement (ATA) was signed between the governments of the ASEAN member countries and China’s government. According to Protocol 1 of this Agreement, which was signed in 2011, “third and fourth freedom” traffic rights are provided for airlines of the relevant ASEAN countries and of China Mainland (i.e. excluding Hong Kong, Macau and Taiwan). By September 13, 2018, the ASEAN-China ATA had been ratified by all ASEAN countries except Cambodia and Laos, which have the right to accept it when ready. China has a significant advantage over ASEAN countries, as its airlines can fly to any point in ASEAN, while certain ASEAN airlines can connect to China only from their home territories, and not from other ASEAN countries. To fly from any ASEAN point to China would require the grant of “seventh freedom” traffic rights among ASEAN countries, which could hurt their domestic aviation markets. In 2014 the governments of ASEAN countries and China signed Protocol 2, which provides “fifth freedom” traffic rights between contracting parties, allowing an airline to fly between foreign countries as part of the services from and to its own country. By September 13, 2018, the protocol had been ratified by five ASEAN members - Malaysia, Myanmar, Singapore, Thailand and Vietnam.

Easing of Restrictions on International Routes Operation

On May 16, 2018, the CAAC officially released the International Route Rights and Resources Allocation and Operational Management Methods, easing restrictions on the number of Chinese airlines allowed to operate international routes from China to some key destinations abroad. Under the previous policy, which had been in place since 2009, operation rights of long-haul international routes were given to Air China, to discourage competition between Chinese carriers on international routes, which usually have low margins. Policy easing became necessary, in view of the rapid growth of China’s aviation market and the upcoming opening of the new Beijing Daxing International Airport, which is expected to be the world’s largest airport and is due to launch by the end of 2019. According to the new rules, both China’s state-controlled and private airlines are allowed to bid for routes between China and the US, Australia, UK, Southeast Asia and other selected locations. The new regulation entered into force on October 1, 2018, opening the door to additional competition on a number of long-haul routes from China.

Source: Xinhua, DBS Bank, East Asia Forum, Caixin

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Foreign Investment Policy

China’s aviation sector has been open for foreign investment since 1994, when the government released the Notice on Policies Concerning Foreign Investment in Civil Aviation, allowing foreign companies to enter into equity joint ventures (EJVs) or contractual joint ventures (CJVs) with or buy shares in China’s airlines and airports. There were limitations on the percentage shares that could be held by foreign-invested enterprises (FIEs) investing in China’s public air transport – namely, 35% of capital and 25% of voting shares.

In 2002, the Provisions on Foreign Investment in the Civil Aviation Industry entered into force, raising the limit of foreign investment in a public air transport enterprise to 49%, with each individual foreign investor allowed to hold an equity stake of up to 25%. FIEs investing in China’s civil airports or in general aviation enterprises operating business flights, air tours or industrial flights, were required to have the Chinese party as the controlling shareholder. For FIEs investing in general aviation enterprises that serviced the agricultural, forestry or fishing industry, the investment share of foreign Investors could be determined freely by the parties and was subject to no limits. FIEs in aircraft repair and maintenance and in aviation fuel projects were required to have the Chinese party as the controlling shareholder and were also obliged to contract for business from the international repair and maintenance market. In projects related to cargo storage and transportation, air catering, parking spaces and ground services, there were no limits on the investment share of the foreign investors.

Since 2002, several provisions supplementary to the Provisions on Foreign Investment in the Civil Aviation Industry have been released, further opening up the sector for foreign investment. In 2005 the CAAC allowed Hong Kong or Macau service suppliers to provide entrusted management of medium and small airports in the form of CJVs, EJVs or solely-funded enterprises, for a period of up to 20 years. They were also allowed to provide airport management training and consultation services in the form of CJVs, EJVs or solely-funded enterprises, as well as a list of air transport ground services in the form of EJVs or solely-funded enterprises.

Source: CAAC, MOFCOM

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Foreign Investment Policy (cont’d)

In 2007, Hong Kong or Macau air service providers became able to establish air transport sales agencies in Mainland China in the form of CJVs, EJVs or solely-funded enterprise, while in 2008 it became possible for them to establish an EJV with a computer reservation system (CRS) service provider from Mainland China – though in this case the latter had to hold a controlling share. In 2016, two supplementary provisions entered into force. One of them allowed Hong Kong and Macao service providers to engage in aircraft repair and maintenance operations in Mainland China in the form of solely-funded enterprises or by holding a controlling share. The other one allowed Taiwan service providers to engage in aircraft repair operations in China Mainland in the form of EJVs or solely- funded enterprises.

Starting on May 1, 2017, Hong Kong and Macau air service providers have been allowed to establish solely-funded enterprises engaged in projects involving cargo storage and transportation, air catering, parking spaces and ground services in Mainland China. From the same date, foreign investors have been allowed to establish solely-funded enterprises in China’s free trade zones (FTZs), operating as air transport sales agencies or service providers in the fields of cargo transport and storage, ground services, air catering and parking space projects. The restriction that the Chinese party must be the controlling shareholder in general aircraft repair and maintenance projects was removed, and foreign investors are no longer to obliged to contract for business on the international repair and maintenance market.

According to the latest version of the Catalogue of Industries for Guiding Foreign Investment, issued by the Ministry of Commerce (MOFCOM) and the National Development and Reform Commission (NDRC) on June 28, 2017, the list of industries promoted by the government for foreign investment includes the manufacturing of aviation ground equipment, civil aircraft and helicopters, as well as aircraft parts and components. General aviation companies fall into the “restricted for foreign investment” category, as they require the legal representative to be a Chinese national. Foreign investment in general aviation companies for agriculture, forestry, and fisheries must be in the form of EJVs, while in other general aviation FIEs the Chinese party has to be the controlling shareholder.

Source: CAAC, MOFCOM

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Domestic Investment Policy

Domestic private investment in China’s aviation sector has been allowed since 2005, when the CAAC released the Provisions on Domestic Investment in the Civil Aviation Industry. This took effect on August 15, 2005, allowing China’s SOEs and non-SOEs to invest, individually or jointly, in the country’s civil aviation sector. To accelerate the deregulation of the country’s aviation sector and improve the efficiency and profitability of state-owned airlines and airports, the Ministry of Transport (MOT) has recently amended the Provisions on Domestic Investment in the Civil Aviation Industry, effective from January 19, 2018. Under the new regulations, China’s “Big Three” airlines are to remain state-holding enterprises (SHEs) or “relatively” SHEs, which means that private investment capital may exceed 50% of their total capital as long as they remain controlled by the state, which continues to hold a share larger than any other single shareholder. Under the previous rules, the “Big Three” had to remain wholly SOEs or SHEs. According to the amended provisions, those civil transport airports which are in cities where provincial governments, autonomous regions’ governments and municipal governments are located must remain wholly state-owned, state-controlled or relatively state-controlled.

The eight Chinese international and regional hub airports that are included in the country’s civil aviation development plan (Shenzhen, Xiamen, Dalian, Guilin, Qingdao, Wenzhou, Ningbo and Sanya), as well as the strategic civil airports in the autonomous regions of Xinjiang and Tibet, are also required to follow the same regulation. Under the previous provisions, the “relatively state-controlled” model in the shareholding structure of China’s civil airports was not permitted. According to the new regulations, China’s civil airports, aviation fuel sales, storage and filling enterprises, CRS service enterprises and their affiliated companies can now own up to 5% of the shares in public air transport enterprises other than all-cargo airlines. They are allowed to own more than 50% of the total capital of an all-cargo airline, but it must remain state-controlled or “relatively” state-controlled. In cases when a public air transport enterprise, or any of its affiliated enterprises, invests in any of the hub airports (or in such an airport’s public terminal building), its investment share may not exceed 25% and that investor cannot not obtain “relative control” by means of its investment. For civil airports, the investment share in aviation fuel sales, storage and filling enterprises, and facilities within the airport may not exceed 25%, and civil transport airports may not obtain “relative control” with their investment.

Source: CAAC, MOT

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06 PASSENGER TRANSPORT

FOCUS POINT

Busiest Airports by Passenger Throughput, 2018

1. Beijing Capital 7. Xi'an Xianyang International Airport International Airport 100,983,290 44,653,310

9. Chongqing Jiangbei International Airport

41,595,890

2. Shanghai Pudong International Airport Beijing 74,006,330 4. Chengdu Shuangliu International Airport

8. Shanghai Hongqiao 52,950,530 Xi’an International Airport Shanghai Hangzhou 43,628,000 Chengdu Chongqing 6. Kunming Changshui International Airport Guangzhou 10. Hangzhou Xiaoshan 47,088,140 Kunming International Airport Shenzhen 38,241,630 3. Guangzhou Baiyun 5. Shenzhen Bao'an International Airport International Airport

69,720,400 49,348,950

Source: CAAC, CEIC

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Highlights

Overview China’s airlines transported 611.7mn passengers in 2018, which represented an increase of 10.9% y/y. The country ranks as the world’s second-largest aviation market in terms of RPK, and IATA projects that it will overtake the current leader, the United States, by 2024-2025. Air passenger turnover reached 1.1tn passenger-km in 2018. Turnover on domestic routes grew by 12.1% y/y to 788.9bn passenger-km, of which 16.5bn passenger-km were attributable to Hong Kong, Macao and Taiwan routes. The passenger turnover on international routes reached 282.2bn passenger-km, an increase of 13.9% y/y. International RPK accounted for 26% of total RPK in China in 2018, which indicates further potential for China’s airlines to expand in the international market.

Challenges The main challenges facing the subsector are related to airspace and air infrastructure limitations. Although the number of new airports in China has been increasing continuously, infrastructure expansion is not keeping up with the rate at which passenger traffic is growing. The lack of an open skies agreement between China and the US restricts the number of flights between the world’s two largest aviation markets. Such an agreement is not expected to be signed soon, mainly due to the US major airlines’ concern that they will not be able to receive enough slots in China’s busiest airports, where the slot allocation process lacks transparency and Chinese domestic airlines receive preferential treatment. Domestic air passenger traffic will continue to be affected by the development of China’s high-speed rail network. The government is also promoting an “integrated connectivity” model, exemplified by the Hongqiao transportation hub, which connects the Shanghai Hongqiao International Airport with the high-speed rail. This model increases airports accessibility and encourages cooperation between high-speed rail and airports.

Outlook China’s passenger traffic is expected to be driven by outbound tourism, which is projected to outpace domestic travel in the mid- to long-term. It is being boosted by the increasing disposable incomes of the Chinese population and its changing lifestyle, which has prompted many countries to relax their visa policies for Chinese citizens, offering visa-on-arrival schemes or even visa exemptions. Fewer than 10% of Chinese citizens hold passports, but this percentage is expected to increase in the next few years. In 2018 the CAAC officially removed the restrictions on China’s major international routes, allowing more than one airline to operate flights between China and some key international destinations, which is expected to support Chinese airlines’ expansion to international routes.

Source: CAAC, DBS Bank

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Main Events

§ In March 2018, the CAAC approved the establishment of Genghis Khan Airlines, the first regional airline of Inner Mongolia special autonomous region of China. In February 2019, the airline received its first ARJ21 aircraft produced by the COMAC. It is the second customer of the ARJ21, after Chengdu Airlines. Genghis Khan Airlines plans to establish a fleet of 25 ARJ21 aircraft within the next five years, becoming the first airline in China to operate a fleet of all China-made jets.

§ In June 2018, China Southern Airlines (CSA) announced that it will invest RMB 10bn to establish Xiongan Airlines in Xiongan New Area, located close to the new Beijing Daxing International Airport and built serve as a development hub for the Beijing-Tianjin- Hebei economic zone. In November 2018, Xiongan Airlines received preliminary approval for establishment from the CAAC.

§ In July, 2018, Juneyao Airlines and its parent company Juneyao Group paid USD 1.9bn for about 5% stake in China Eastern Airlines (CEA). Juneyao Airlines expects the investment to improve the strategic partnership between state-owned capital and private capital and to help build up its brand internationally.

§ In September 2018, China’s largest LCC carrier Spring Airlines announced that it will invest RMB 846mn to acquire 1.63% in CSA, becoming its fifth largest shareholder after China Southern Airlines Group (52.65%), China National Aviation Fuel Group (5.79%), China Securities Finance (3.72%) and China Structural Reform Fund (2.82%).

§ In December 2018, the US-based aircraft maker Boeing opened its first overseas plant in China, which will paint and fit the interiors of jets constructed in the US for Chinese airlines. It will process 100 jets per year and will employ up to 300 workers. Boeing has invested USD 33mn in the new facility, which is a joint venture between Boeing and China’s state-owned aircraft manufacturer Commercial Aircraft Corporation of China Ltd (COMAC). As of August 2018, Boeing had 1,670 planes in service in China, followed by Airbus with 1,598 planes, according to data from CAPA Centre for Aviation. Boeing delivered more than one out of every four jets it made in 2017 to China, where it forecasts demand for 7,700 new airplanes over the next 20 years valued at USD 1.2tn.

§ In January 2019, CEA acquired a 7% stake in Juneyao Airlines, while it plans to invest up to RMB 3.15bn to purchase up to 169mn shares of the airline, aiming to increase its ownership stake in Juneyao Airlines to 15%.

Source: China Daily, Financial Times, Caixin, Company Data, Aeronautics Aviation News and Media

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Main Indicators

Highlights Air Passenger Traffic by Destination, thou tonnes Driven by the increased demand for travel, in 2018, the sector’s witnessed a 10.9% y/y growth in 611.7 551.6 air passenger traffic volume. A total of 611.7mn 488.0 436.2 63.7 391.9 55.4 passengers were transported by domestic 42.1 51.6 airlines, including 548.1mn on domestic routes, 31.6 496.1 548.0 up by 10.5% y/y, and 63.7mn on international 360.4 394.1 436.3 routes, up by 14.8% y/y. 2014 2015 2016 2017 2018 In 2018, the sector witnessed a 12.6% y/y increase Domestic* International Total in the passenger turnover, which reached nearly 1.1tn passenger-km. Air passenger turnover on Air Passenger Turnover by Destination, domestic routes totalled 788.9bn passenger-km, bn tonne-km up by 12.1% y/y. International routes registered a 1,071.2 transport turnover of 282.2bn passenger-km, an 951.3 837.8 282.2 increase of 13.9% y/y. 728.3 247.6 633.4 216.0 171.7 131.7 In 2018 air passenger load factor of the Chinese 703.7 788.9 airlines remained unchanged at 83.2%. 501.7 556.6 621.8

2014 2015 2016 2017 2018

Domestic* International Total

Air Passenger Load Factor, %

0.9% 0.7% 0.6%

0.4% 83.2 83.2 82.6 82.1 81.4 0.0% 2014 2015 2016 2017 2018

Air Passenger Load Factor, % y/y change, %

* Including Hong Kong, Macau and Taiwan Source: CAAC, CEIC

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“Big Three” Airlines Main Indicators

Passenger Traffic, mn person Passenger Turnover, bn person-km 139.9 259.2 126.3 230.7 121.1 220.7 114.6 110.8 109.7 206.1 109.4 201.1 200.9 101.7 101.6 189.6 100.9 188.1 183.2 96.6 93.8 171.7 89.8 167.5 166.6 83.9 83.0 154.7 146.3 127.6

2014 2015 2016 2017 2018 2014 2015 2016 2017 2018

CSA CEA Air China CSA Air China CEA

Passenger Capacity (ASK), mn Passenger Load Factor, % 82.4 82.3 82.2 314.4 280.6 273.9 81.2 81.1 256.0 81.1 247.9 244.3 235.6 233.1 80.7 226.0 80.6 80.5 214.8 80.5 80.5 209.8 206.2 193.6 181.8 79.9 79.9 160.6 79.5 79.4

2014 2015 2016 2017 2018 2014 2015 2016 2017 2018

CSA Air China CEA CSA CEA Air China

Source: Company Data

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07 FREIGHT TRANSPORT

FOCUS POINT

Busiest Airports by Freight Throughput, tonnes, 2018

2. Beijing Capital 7. Zhengzhou Xinzheng International Airport International Airport 2,074,005 514,922

10. Chongqing Jiangbei International Airport 382,161

1. Shanghai Pudong International Airport Beijing 3,768,573

5. Chengdu Shuangliu International Airport 9. Shanghai Hongqiao Zhengzhou Shanghai International Airport 665,128 Hangzhou 407,155 Chengdu Chongqing

8. Kunming Changshui International Airport Guangzhou 6. Hangzhou Xiaoshan 428,292 Kunming International Airport Shenzhen 640,896 3. Guangzhou Baiyun 4. Shenzhen Bao'an International Airport International Airport

1,890,560 1,218,50

Source: CAAC

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Highlights

Overview China’s air freight market ranks second in the world after the US, with a total freight turnover of 26.2bn tonne-km realised in 2018, according to the CAAC. China’s largest air freight carriers in terms of revenue freight tonne-kilometer (RFTK) are Air China and CSA, with a total of 8bn tonne-km and 7.5bn tonne-km in 2018, respectively. The largest regional air freight carrier is the Hong-Kong based Cathay Pacific Airways, with total freight turnover of 10.7bn tonne-km in 2017, according to IATA.

Challenges China’s freight traffic expansion can be explained mainly by the growing foreign trade, as well as by the rapidly developing consumer demand within China. Although there has been a partial opening of China’s skies for cargo flights, the subsector is restricted by capacity limits, as demand exceeds capacity. China has granted co-terminalisation rights and “fifth freedom” rights to some foreign cargo carriers, however, due to slot restrictions many cargo operators are not able to make use of these rights in practice – which is the main challenge that the subsector faces. The ongoing airport expansion of Shanghai Pudong International Airport and the construction of Beijing’s second airport, which are both scheduled to be completed by the end of 2019, are expected to increase slot availability at China’s two major airports.

Outlook China’s move from an industry-driven to a more service-oriented economy is expected to cause a slowdown in the growth of freight traffic in the mid-to-long term. However, the country will continue to maintain a leading position on the global freight market. In 2018, Boeing forecast that China will require 200 new air cargo freighters and 470 converted freighters over the next 20 years. China is the world’s largest e-commerce market with USD 1.33tn of goods sold in 2018, an increase of 24% over 2017, and the online retail is expected to continue to witness strong growth in the next few years.

Source: China Aviation Daily, China Daily, Boeing

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Main Events

§ In March 2018, Alibaba Group Holding Ltd announced its plan to acquire a 14% stake in STO Express Co Ltd, one of the largest express delivery companies in China through a new subsidiary that is yet to be established. Alibaba will invest RMB 4.7bn for a 49% stake in the new subsidiary, and by extension will acquire about 14% of STO Express. Alibaba stated that the investment is a step forward in reaching its goal of 24 hour delivery anywhere in China and 72 hours globally.

§ In September 2018, the CAAC approved the establishment of China Northwest International Cargo Airlines with a registered capital of RMB 1bn. Half of the registered capital came from Shaanxi Provincial Communication Construction Group, while the remainder was shared between YTO Cargo Airlines, Shaanxi West Ham District Metro Airport Development and Construction Group and Western Airport Group, which invested 20%, 20% and 10% of the total registered capital, respectively. The new airline will operate out of Xian Xianyang International Airport, providing domestic and international cargo and mail transportation services using Boeing 737 aircraft.

§ On December 28, 2018, Air China announced that it sold its 51% stake in Air China Cargo Co Ltd to Aviation Capital Holding Co Ltd (AVIC Capital Co Ltd) for RMB 2.4bn. The remaining 49% stake in Air China Cargo is held by Cathay Pacific Airways. Air China announced that it will concentrate its resources on the air passenger transport business while mitigating the impacts of intensified competition in the cargo transportation market.

Source: Air Cargo News, China Daily

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Main Indicators

Highlights Air Freight Traffic by Destination, thou tonnes In 2018, China’s airlines transported 7.4mn tonnes 7,385 of freight, representing an increase of 4.6% y/y. 6,680 7,058 6,293 2,427 Freight traffic on international routes grew faster 5,941 1,932 2,221 1,868 than the domestic freight traffic, reaching 2.4mn 1,684 tonnes, an increase of 10.3% y/y. It was mainly 4,748 4,837 4,958 driven by the robust expansion of e-commerce. 4,257 4,424 Freight traffic on domestic routes rose by 3.3% y/y to 5mn tonnes. 2014 2015 2016 2017 2018

In 2018, China had a freight turnover of 26.2bn Domestic* International Total tonne-km – up by 7.8% y/y – of which 7.6bn tonne- km was attributable to domestic routes and Air Freight Turnover by Destination, mn 18.7bn tonne-km on international routes, up by tonne-km 3.4% y/y and 9.6% y/y, respectively. 26,242 24,354 22,113 Freight load factor was 73.2% in 2018, down by 0.4 20,807 17,060 18,700 pp over 2017, as demand for air freight transport 14,040 14,930 weakened due to economy slowdown, while domestic airlines continued to expand their fleet. 6,690 7,190 7,300 7,550

2015 2016 2017 2018 Domestic* International Total

Air Freight Load Factor, %

1.1%

0.7% 0.4% 73.5 73.2 72.7 72.2 71.9 -0.4% -0.4% 2014 2015 2016 2017 2018

Air Freight Load Factor, % y/y change, %

* Including Hong Kong, Macau and Taiwan Source: CAAC, CEIC

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“Big Three” Airlines Main Indicators

Freight Traffic, thou tonnes Freight Turnover, mn tonne-km 7,987 7,552 7,506 7,009 6,994 1,908 1,846 6,558 1,769 1,727 6,220 1,672 1,664 1,612 5,691 5,662 1,553 1,511 1,433 5,056 1,400 1,395 1,365 4,875 4,865 4,800 933 915 2,663 2,585

2014 2015 2016 2017 2018 2014 2015 2016 2017 2018

Air China CSA CEA Air China CSA CEA

Freight Capacity (AFTK), mn tonne-km Freight Load Factor, % 14,430 14,237 13,313 58.9 13,075 56.1 56.7 12,749 56.1 54.9 54.7 54.8 11,989 11,948 51.6 10,999 10,148 9,572 9,440 8,882 37.7 8,153 8,008 32.3 7,058

2014 2015 2016 2017 2018 2014 2015 2016 2017 2018

CSA Air China CEA Air China CEA

Source: Company Data

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