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China Eastern’s passenger traffic rises, but yield remains weak

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Passenger revenue drivers

In the previous article, we discussed the growth trend in China Eastern’s revenue and the impact of global economic conditions. In this article, we’ll explore the trend in major drivers of passenger revenue, which accounts for the major source of China Eastern’s (CEA) revenue.

A rise in traffic was the primary driver in the passenger revenue growth for China Eastern Airlines. The airline’s passenger traffic increased at a three-year CAGR of ~9% to 120,461 million revenue passenger kilometers from 93,152 million revenue passenger kilometers in FY10. Its share of domestic traffic decreased from ~70% in FY11 to ~69% in FY13, while international traffic increased to ~28% from 26% in FY11. Around 3% comprises regional traffic from Hong Kong, Macau, and Taiwan.

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China Eastern’s competitor, China Southern Airlines (ZNH), has the highest share in the domestic market among the three state-owned Chinese airlines. It derives 78% of its revenue from the domestic market and only 20% from international markets. Refer to China Southern one of China aviation industry’s Big 3 players for further details on the industry.

Lower yield and capacity utilization

In FY13, demand and capacity growth has been higher in the international market. Traffic and capacity has grown at ~15% in the international market, compared to ~9% in the domestic market. In spite of the growth in traffic, utilization and yield has decreased. Load factor, or capacity utilization, has declined by 1.5% to 71.5%. Passenger yield, or average fares paid by passenger per mile, has decreased by ~6% to 0.61 renminbi. This could be due to increased competition in the Chinese aviation industry. We will explore this further in Part 5.

Although passenger yield and load factor has decreased for the major Chinese airlines during FY13, it has improved for US airlines, contributing to higher margins. In FY13, the load factor of major US airlines including Delta Air Lines (DAL), United Continental Holdings (UAL), Alaska Air Group (ALK), JetBlue Airways Corporation (JBLU), Southwest Airlines (LUV), and American Airlines (AAL) was between 80% to 85%.

ETFs holding shares of US airlines include the iShares Transportation Average ETF (IYT) and the SPDR S&P Transportation ETF (XTN).

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