Summary of Key Points
Four departments, including the Civil Aviation Administration and the National Development and Reform Commission, have jointly issued a non-public but highly significant document aimed at addressing the issue of "involutionary competition" within the civil aviation industry. The main goal is to stabilize the number of public airlines by 2030, shifting the focus from prioritizing entry to both entry, regulation, and exit. The document supports mergers and reorganizations and mandates the mandatory closure of inefficient airlines in order to optimize the supply structure. However, the effectiveness of these measures will depend on whether they can truly lead to a reduction in operational capacity (such as fewer aircraft and the adjustment of less profitable routes), rather than merely decreasing the number of airlines. Currently, integrations within existing groups are expected to precede cross-group acquisitions, with Happy Airline potentially becoming the first case study for administrative exit.
I. Core of the New Regulations: From Expanding to Improving Quality – A Cap on the Number of Airlines by 2030
In the past, the civil aviation industry aimed to increase the number of airlines, which led to fierce competition for routes and price cuts, resulting in increasing losses. The new regulations set a cap on the number of airlines, which will remain around the current 65. This means that new airlines will only be able to operate if existing ones exit or merge and dissolve, gradually reducing the total number.
The message from the document is clear: The focus is no longer on which company has the most airlines, but on which ones are the most efficient. For example, airlines are required to provide substantial registered capital (at least 600 million yuan for passenger services and 400 million yuan for freight services), and the background of their controlling shareholders will be thoroughly reviewed to prevent the entry of "shell companies" that could disrupt the market.
II. How Does the Exit Mechanism Work? Two Approaches to Eliminate Inefficient Airlines
The new regulations focus on creating an exit mechanism through two main pathways:
1. Market-based Exit: Airlines can choose to merge, dissolve, or undergo bankruptcy reorganization. For instance, large airline groups may consolidate their subsidiaries (for example, HNA may merge its nine loss-making subsidiaries) to reduce the number of companies within the group. Mergers between airlines are also encouraged.
2. Administrative Forced Exit: Airlines with significant issues will be addressed through a prescribed process: initial warnings, followed by suspension for rectification; if improvements are not made, their business scope will be reduced, and ultimately, their licenses will be revoked. Airlines that are identified as having major safety hazards, low operational efficiency (such as frequent accidents), or high financial risks (heavy debt) will be forced to exit.
Happy Airline, which has been out of operation for a year with debts exceeding 5 billion yuan and owes wages and social security to its employees, could become the first to undergo the administrative exit process. This will test how passengers are accommodated, tickets are handled, flight rights are managed, and employees are compensated. If this goes smoothly, it will serve as a model for other smaller airlines facing similar issues.
III. Which Airlines Will Be Affected First? Group Integrations Take Priority; Cross-group Mergers Are Less Likely
While many are concerned about which airlines will go bankrupt, industry insiders believe that:
- Group Integrations Will Occur First: The three major airlines (CAAC, COA, and CNA) all have subsidiaries that are losing money (for example, CAAC's Shenzhen Airlines lost 1 billion yuan in half a year, and HNA's nine subsidiaries are all in the red). It is more practical for them to consolidate their internal problems before acquiring other companies.
- Happy Airline Is a Test Case: Its situation is not directly caused by the new regulations, but it will serve to test the feasibility of the administrative exit process.
- Cross-group Mergers Are Difficult: The three major airlines are struggling financially and lack the motivation to acquire other airlines. Moreover, the new regulations do not require bankruptcy as a condition for forced exit, so it is unlikely that we will see a wave of major airlines acquiring smaller ones immediately.
IV. Bankruptcy Does Not Necessarily Mean a Reduction in Operational Capacity: Challenges in Aircraft Disposal and Local Subsidies
Many assume that airline bankruptcies will end the involutionary competition, but this is not always the case. For example, after HNA's bankruptcy reorganization in 2021, the number of aircraft and routes did not decrease; the company just changed owners, and competition continued. The reasons for this are:
- Difficulties in Disposing of Aircraft: Aircraft are a core asset for airlines, and selling or leasing them in China is complex, involving considerations such as ownership, maintenance records, and export procedures, unlike in the United States.
- Local Subsidies: Many small and medium-sized airlines are funded by local governments, which provide financial support, allowing them to continue operating despite losses. The new regulations only guide local governments to regulate subsidies more effectively, without imposing strict restrictions, so these airlines may not collapse immediately.
- High Exit Costs: Airlines face challenges in handling passenger resettlement, employee employment, and airport services, making the exit process cumbersome.
To truly address involution, it is necessary to reduce the number of aircraft (through leasing or sales), eliminate less profitable routes, and reallocate flight rights, rather than simply canceling airline licenses.
V. How to Evaluate the Effectiveness of the New Regulations? Profitability Depends on Whether Capacity Growth Outpaces Demand
The success of the new regulations in alleviating the industry's difficulties depends on two key factors:
1. Whether Capacity Growth Outpaces Demand: If the growth in aircraft capacity is slower than passenger demand, prices can rise, and airlines can profit. If the number of airlines decreases but the number of aircraft remains the same, competition will continue among a few large airlines, leading to losses.
2. Whether Local Subsidies Are Reduced: If local governments continue to subsidize smaller airlines, they will still compete at lower prices, preventing the cessation of involutionary behavior.
Industry forecasts suggest that the number of airlines may decrease from 65 to 55-60 by 2030, mainly through group integrations, with some airlines being forced out due to safety or financial issues. If capacity growth can be slowed down below demand, airline profitability may improve by 2027-2028. Otherwise, the involutionary competition will continue.
In summary, the new regulations represent a "first step" in addressing the problem of involutionary competition, but whether they can truly solve it will depend on how well they are implemented, especially in terms of reducing actual operational capacity and eliminating subsidies. After all, when oil prices rise, the cost of ceasing operations is higher than continuing to operate at a loss, and airlines are often forced to compete despite their wishes.