The coronavirus has had a particularly hard hit on aviation industry across the globe. Many European and American airlines are talking about survival and bankruptcy, but China’s biggest airlines like China Southern Airlines (ZNH) , China Eastern Airlines (CIAH) (CEA) and Air China are silent. Thus the question arises, why Chinese airlines are not worried about survival and possibility of bankruptcy?
There is definitely more than one answer to this question, but the main reason big three Chinese airlines feel safe is that they are state-owned. The main goal of the Chinese airlines is to spur the growth of the country’s economy rather than making significant profits.
When major European and American carriers axed their flights to mainland China due to fears of coronavirus spreading, the China’s airline trio continued to operate their services to Europe and the US. The demand was low, but there still was demand, thus the airlines, encouraged by state subsidies and serving the left-over demand for flights to China, may have had opportunity to operate at a smaller loss than any privately owned airline could ever achieve.
The other factor keeping Chinese airlines safe is that their objective is to serve and execute government policies rather than make profits and operate efficiently. As a result, the airlines can still perform flights not worrying about their finances as at the end of the day government subsidies will ensure their survival during the coronavirus crisis.
The negative side of subsidies
The involvement and subsidies given to Chinese airlines have already caught eyes of major airlines, especially from the US. American Airlines (A1G) (AAL) had routes connecting Chicago to Beijing and Shanghai, but after a year the airline had to cancel the routes as it was losing “big sums of money” on every flight. This in part shows the biggest problem between state and privately owned airlines.
Chinese airlines have a huge advantage compared to American or any other US carrier when it comes to costs. In China labour is cheap and the addition of government subsidies give Chinese airlines a possibility of offering dirt cheap tickets to the US, which decreases the competition and over time increases ticket prices for the given route.