Investment Research Analysis Risk Management Air China

Air China generally refers to Air China Limited, which was formally established in Beijing in 1988. It is the only civil airline in China that is allowed to use the national flag on its planes. And is also the first airline in China to join Star Alliance. Air China is the main air transportation company controlled by China National Aviation Holding Company. Also short for CNAirHolding and it is regarded as one of the three major airlines in China together with China Eastern Airlines and China Southern Airlines. Air China business volume in 2020 is 136.181 billion yuan, with more than 83,000 employees.

Main operating bases: Beijing Capital International Airport and Chengdu Shuangliu International Airport.

International Gateway: Shanghai Pudong International Airport.

Other hubs: Hangzhou Xiaoshan International Airport, Wuhan Tianhe International Airport, Tianjin Binhai International Airport, Chongqing Jiangbei International Airport and Hohhot Baita International Airport.

Frequent flyer program/mileage reward program: Phoenix Miles.

The History of Air China

On 1/1/1955, the predecessor of Air China, the Flight Corps of Beijing Administration of Civil Aviation, was formally established.

In 1988, the Beijing Administration of Civil Aviation was established, and Air China was established as well.

From 28/10/2002, According to the Civil Aviation System Reform Plan approved by the State Council, Air China, together with China National Aviation Corporation and China Southwest Airlines, That established China Aviation Group Corporation. And based on the air transportation resources of the three parties, established a new Air China.

During 30/9/2004, with the approval of the State-owned Assets Supervision and Administration Commission of the State Council, Air China Limited (hereinafter referred to as Air China), the main air transportation company controlled by China Aviation Corporation, was formally established in Beijing, continuing to retain the name of the former Air China and using the logo of Air China.

On 15/12/2004, Air China Limited was successfully listed in Hong Kong (stock code 0753) and London (stock code AIRC).

On 18/8/2006, Air China Limited became the first airline listed in Hong Kong (Air China), London (London LSE：AIRC) and mainland China (Shanghai Stock Exchange stock code 60111).

At the end of 2007, Air China Limited officially joined the Star Alliance.

During the Beijing 2008 Olympic and paralympic games, it offered air transport services.

In 2011, the cargo joint venture between Air China Limited and Cathay Pacific Airways Limited was officially completed. And the restructured Air China Limited held its opening ceremony in Beijing on May 6, 2011. Subsequently, after the joint venture, Air China holds 51% equity of Air China International Cargo, while Cathay Pacific holds 25% equity and 24% economic interest. Moreover, the board of directors of Air China International has seven directors, four of whom are appointed by Air China and three by Cathay Pacific. So, the cargo fleet of the joint venture company will reach the scale of 12 Boeing 747-400 cargo planes in a short time, with Shanghai as its main operating base.

In 2021, according to the evaluation of the world brand laboratory, the brand value of Air China was RMB 197.236 billion, ranking first in China’s civil aviation.

During the Beijing 2022 Olympic and paralympic winter games, Air China became the official transport services parter again.

On 14/1/2022, Air China and ST Shandong Airlines announced at the same time, and Air China, Shandong Airlines Group, Shandong Airlines and Shangang Jinkong signed a framework agreement on equity transfer and capital increase.

Line of Business

Air China is responsible for the task of providing special flight services for China’s leaders when they go on foreign trips. It is also responsible for chartering special flights within China for many foreign heads of state and government leaders, thereby demonstrating Air China exclusive status as the national flag carrier. Headquartered in Beijing, Air China has several branch offices in areas such as Southwest China, Zhejiang, Chongqing, Tianjin, Shanghai, Hubei, Xingjiang, Guangdong, Guizhou, Tibet, and Wenzhou. Air China main subsidiaries include Shenzhen Airlines Co., Ltd.（As well as Kunming Airlines Co., Ltd.）, Air Macau Co., Ltd., Beijing Airlines Co., Ltd., Dalian Airlines Co., Ltd., Air China Inner Mongolia Co., Ltd., Ameco Beijing, Air China Import and Export Co., Ltd., Chengdu Falcon Aircraft Engineering Service Co., Ltd., and Air China Shantou Industrial Development Company.

Its joint ventures include GA Innovation China Co., Ltd. and Sichuan Services Aero-Engine Maintenance Co., Ltd. Air China also holds shares in Cathay Pacific Airways Limited, Shandong Airlines Co., Ltd., and Tibet Airlines Co., Ltd., and is the largest shareholder of Shandong Airlines Group Co., Ltd. Beijing Air Catering Co., Ltd. was formerly controlled by Air China, Ltd. From now it belongs to the China National Aviation Holding Company (CNAH). Consequently, the company was established on May 1, 1980 in Beijing as the first joint venture launched after the enactment of the Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures.

As of December 31, 2021, Air China (including its subsidiaries) had a total of 746 aircrafts of all types. Mainly Boeing and Airbus, with an average age of 8.23 years, operating 672 passenger routes to 151 cities in 25 countries and regions. Our service was further extended to 1,300 destinations in 195 countries (regions) through cooperation with airlines such as Star Alliance Members.

Now, according to the authorization in their business license, they are allowed and eager to do more than just passenger and freight transportation at home and abroad. They also plan to carry out more ground services and air express delivery related to their main business, Duty-free goods on board, On-board commodity retail business,Aviation accident insurance sales agent,Import and export business, Hotel management, Sales of daily necessities, handicrafts, souvenirs, knitted fabrics, stationery, sporting goods, machinery and equipment, hardware and electrical equipment, electronic products, clothing, and so on.

Objectives

Air China is committed to providing passengers with “Four Cs” service: Credibility, Convenience, Comfort, and Choice. Furthermore, its “PhoenixMiles” frequent flyer program has the longest history of any frequent flyer program in China. The program integrates frequent flyer members from several of the brands which Air China controls or holds shares in. Thanks to our customer-oriented approach, Air China has continuously improved the quality of services in order to meet the diverse and individual needs of our passengers. Air China has a strong domestic and international route network and sales network, and an extensive high quality customer base. It has become the preferred airline for many Chinese government agencies and corporate business customers.

In fact, Air China is not founded by any one person, because it is China’s central enterprises, which means literally this company and its property belongs to all the people of China. The central enterprise refers to a wholly state-owned or state-controlled enterprise. That is managed by the central people’s government (the State Council) or entrusted by the state-owned assets supervision and administration institution And also whose leadership is directly managed by the central government or entrusted by the central organization department, SASAC and other central ministries and commissions.

Furthermore, Air China, the predecessor of Air China Limited, was founded in 1988. The predecessor of Air China-Flight Corps of Beijing Administration of Civil Aviation was formally established on January 1, 1955. Subsequently, In 1988, the Beijing Administration of Civil Aviation was established, and Air China was established.

According to the Civil Aviation System Reform Plan approved by the State Council, on October 28, 2002. Air China, together with China National Aviation Corporation and China Southwest Airlines, established China National Aviation Group Corporation. And based on the air transportation resources of the three parties, established a new Air China.

On September 30, 2004, with the approval of the State-owned Assets Supervision and Administration Commission of the State Council, Air China Limited (hereinafter referred to as Air China). Also is the main air transportation company controlled by China Aviation Corporation, was formally established in Beijing, continuing to retain the name of the former Air China and using the logo of Air China.

What is the ownership stake in the company

At present, Song ZhiYong is the current chairman of Air China, who has worked in this company since it was established. And he is also the current Chairman of China National Aviation Group Corporation. We can also see that the current directors and responsible persons of Air China are basically people who have been working in this company since the founding of Air China or even earlier.

On March 7, 2006, Air China had a registered capital of 14,524,815,185 yuan.

According to the publicity materials on March 31, 2022, the following are the top 10 shareholders with shareholding ratio.

Source Air China website

At present, Song ZhiYong is the current chairman of Air China, who has worked in this company since it was established. And he is also the current Chairman of China National Aviation Group Corporation. We can also see that the current directors and responsible persons of Air China are basically people who have been working in this company since the founding of Air China or even earlier.

Song ZhiYong not only served as the chairman of Air China, but also is the director of Civil Aviation Administration of China. This may be difficult to understand in western countries. The directors of a company also serve in government departments, but this is the proof that Air China is a central enterprise.

Song ZhiYong was the first batch of civil aviation pilots after the founding of New China. He joined Air China in 1987 as a pilot. After a series of promotions, he finally became the captain of Air China Flight Corps in 2002, the assistant president of Air China in 2004. Then the vice president and deputy general manager, and finally became the president of Air China in 2014, and soon became the executive director.

In 2020, he became the chairman of the board of directors, and in 2022 he became the director of the Civil Aviation Administration of China. We have to say that from his experience, his professional ability is very in line with the characteristics of Air China, from a powerful pilot to a manager. Such a person must be very familiar with the work of the company from the grass-roots level.

Who is a part of the executive team?

What are their qualifications?

At present, Song ZhiYong is the current chairman of Air China, who has worked in this company since it was established. And he is also the current Chairman of China National Aviation Group Corporation. We can also see that the current directors and responsible persons of Air China are basically people who have been working in this company since the founding of Air China or even earlier.

Song ZhiYong not only served as the chairman of Air China. But also is the director of Civil Aviation Administration of China. This may be difficult to understand in western countries. The directors of a company also serve in government departments, but this is the proof that Air China is a central enterprise.

Song ZhiYong was the first batch of civil aviation pilots after the founding of New China. He joined Air China in 1987 as a pilot. After a series of promotions, he finally became the captain of Air China Flight Corps in 2002, the assistant president of Air China in 2004. Then the vice president and deputy general manager, and finally became the president of Air China in 2014. And soon became the executive director. In 2020, he became the chairman of the board of directors, and in 2022 he became the director of the Civil Aviation Administration of China. We have to say that from his experience, his professional ability is very in line with the characteristics of Air China, from a powerful pilot to a manager. Such a person must be very familiar with the work of the company from the grass-roots level.

Ma ChongXian is the current director, general manager and president of Air China. He graduated from the major of planning statistics, and also has an MBA degree from Tsinghua University, top2 in China. He started his career with Air China Inner Mongolia Branch and was promoted step by step. After Air China acquired Shandong Airlines in 2010, he became the chairman and president of Shandong Airlines, laying the foundation for his later management of Air China, a larger company.

Ni JiLiang is now the vice president of Air China. His undergraduate major is aircraft engine equipment maintenance in the Department of Aviation Machinery. He joined Air China in 1988, became the CEO of Beijing Aircraft Maintenance Engineering Co., Ltd. in 2017, and became the chief engineer and vice president of Air China in 2022. He is another manager with professional knowledge of aircraft.

Judging from the backgrounds and majors of the three main leaders of Air China, we can see that the combination of this leading group is very reasonable. The three people have different professional fields, but they are all very helpful in managing Air China. The combination of pilots, aircraft maintenance engineers and management professionals ensures the operation of Air China.

Brand position of Air China: to be an airline recognized by mainstream customers, the most valuable and profitable airline in China and an internationally competitive airline.

Air China customers in China

Demographic profile

• Like other airlines, Air China has a relatively high share of 30 – 39 year old customers.

56% of Air China customers are female.

• Air China has a larger share of customers with a high income than other airlines.
• Air China customers are more likely to live in megacities than airline customers in general.

Consumer lifestyle

• Safety and security is an important aspect of life for 48% of Air China customers.
• Fashion and beauty are relatively prevalent interests of Air China customers.
• Traveling is a relatively popular hobby among Air China customers.

Consumer attitudes

• It stands out that 54% of Air China customers say that when it comes to traveling, sustainability is important to them.
• 42% of Air China customers are innovators or early adopters of new products.
• The environment and health & social security are issues of particular concern to Air China customers.

Marketing touchpoints

• Air China customers access the internet via a gaming console more often than the average airline customer.
• On social media, Air China customers interact with companies more often than other airline customers.
• Air China customers relatively frequently consume traditional types of media, like TV and movies in the cinema.

 Strong brand advantage: 

• Air China positioned its brand as “professional and reliable with both international quality and Chinese temperament”. By virtue of the immense historical heritage, Air China strives to create a perfect travel experience and help passengers to stay safe by upholding the spirit of Phoenix of being a practitioner, promoter and leader for the high-quality development of the aviation industry in the PRC.
•  The Company is also committed to leading the industrial development by establishing itself as a “National Brand”. While pursuing outstanding performance through innovation and excelling efforts. By maintaining its world-class safety operation performance and leading comprehensive operating strengths in Mainland China. The Group has extensive brand recognition and excellent brand reputation among consumers.

Balanced and complementary route network:

• Air China comprehensively reinforced the global network and implemented national development strategies. Although, with the consistent efforts in building a world- class hub in Beijing and an international hub in Chengdu. Consequently, After years of development, the Company has taken the lead in market share in respect of mainstream international routes from domestic cities to Europe and North America.

High quality customer base: 

• Air China targeted the mainstream market of mid-to-high- end government and corporate passengers, which is currently the most valuable passenger group in China. As at the end of the Reporting Period, the number of “Phoenix Miles” members has exceeded 72.0656 million.

Leading cost control mechanism: 

• In 2021, in face of the lingering impact of the COVID-19 pandemic, Air China formulated and resolutely implemented. The overall, work approach based on the principle of maximizing revenue and efficiency. Apart from investment in safety assurance and pandemic prevention, the Group put emphasis on cost control at source. That enhanced the integrated use of its existing assets effectively, exercised strict control on new investment and gave due consideration to the cost- effectiveness and financial security.
• The Group also devoted strenuous efforts in allocation and coordination of aircraft introduction, investment in infrastructure and aircraft materials so as to control asset-related costs at source.
• In addition, the Group innovated its business management model to better control major expenses and enhance cost efficiency, provided that investment in safety operation is secured. It refined the management of rigid costs and vigorously curbed controllable expenses.

Continuous innovation of management mechanism:

• Air China strengthened its strategic planning of technological innovation and formulated a Technological Innovation Development Plan for the “14th Five Year Plan” Period. This plan established the development goal of shifting from the system developmen. However, that stages to the effectiveness upgrading stage for technology innovation for the “14th Five Year Plan”.

Quantitative Analysis

 Review Air China Website

Graph Air China Website

Source Market share

Both operating revenues and expenses are relatively stable between 2018 and 2019. However, there is a sharp decline in revenue. This can be explained by the decreasing number of flights caused by the global pandemic. Although, the variable cost also decreased due to less operational activities. There is still a large decrease in net profit from approximately $14 billion gain to a $11 billion loss in between 2019 and 2020.

However, as the pandemic eased, so did the airline industry. We can see from the Main cost table that the variable costs. Such as Jet fuel costs, Take-off, landing and depot charges and Air catering charges. That mostly depend on the Number of flights and passenger traffic, have slightly increased. This indicates that the airline industry is gradually recovering from the impact caused by the pandemic.

Source Marketshare

From the graph above, we can see that from 2019 to 2020, the Operating Net Cash Flow decreased sharply from $33.6 billion to negative $4 billion. A decrease in cash flow from operating activities is caused by revenue decline or costs increase. With the resulting factor of a decrease in net income. This shows how seriously the pandemic has affected the airline industry.

Inversely, the Financing Net Cash Flow increased from negative $19.5 billion to $16.9 billion in the same period. An increase in cash flow from financing activities indicates that more money is flowing into the company than flowing out. Which increases the company’s assets.

Using the information above and the DCF formula, I can make a projected cash flow analysis. I add up the Discounted cash flow each year and get a result of $9.6 billion. However, the initial investment is about $10.4 billion, meaning that the NPV is about negative $0.8 billion, indicating that the projected cost would be more than the projected return. Since rational investors only invest in transactions that have a positive NPV, they will not invest in this company.

Table of Marketshare

The annual earnings before interest, tax, depreciation, amortization (EBITDA) of Air China has experienced an overall increase from 2010 to 2019, peaking at 35.92 billion yuan. Amid the COVID-19 pandemic, the EBITDA dropped by almost 75 percent in 2020, reaching only 9.24 billion yuan. Between 2010 and 2019, a steady increasing EBITDA indicates that the company has a good cash flow and stable earnings, which are able to attract investors from investing in it. Comparing the EBITDA margin to the whole industry. It is shown that Air China has always kept a 2 to 3% advantage against the industry average. That indicates the whole company maintains a good development trend. However, it is affected by the pandemic starting from 2020. Air China current EBITDA margin is -8.34%, well behind the industry average value 7.93%. This shows that the company business has profitability problems as well as issues with cash flow.

Source Marketshare

• Among the current assets in 2021, cash holding were accounting for 52.42% of the current assets and representing an increase of 172.95% from that as at 31 December 2020.
• Company has large amount of cash holding in recent year, which means the company will have enough cash to run during the pandemic.

History Of  Market share

• The capital structure of Q1 2022 indicate that the company have a high leverage structure.
• This structure will lead to higher growth rates.

• Debt/Equity ratio increases during the pandemic.
• The shareholder’s equity decreases during the pandemic.
• Debt equity ratio has increased from 1.6 to 4.5 over the past 5 years.

Stock Price Analysis

Relative Strength Index (14D) is a momentum oscillator that measures the speed and change of price movements. I use a most popular implementation of RSI which looks at a 14-day timeframe. Index scores range from 0 to 100, where the stock is considered overbought when the index is above 70 and oversold when below 30. Air China 14 day RSI of 42.66 suggests the company is trading in technically neutral territory.

In general, we can see that Air China RSI is higher than its domestic competitors but lower than both industrial average and foreign competitors.

Moreover, this chart depicts the distribution of relative strength index (14d) for companies operating in the Industrials sector in the Developing economic region. Over 3,190 companies were considered in this analysis, and 2,957 had meaningful values. The average relative strength index (14d) of companies in the sector is 53.78 with a standard deviation of 12.51. In contrast, Air China Limited’s Relative Strength Index (14d) of 42.66 ranks in the 18.4% percentile for the sector.

Source Yahoo Finance

Source Yahoo Finance

Next, I did a comparative analysis between the Air China Stock Price and S&P 500 Index. Although the S&P 500 Index experienced tremendous downward trends during the beginning of the pandemic, it kept an overall increasing trend. This indicates that the economic health in the beginning 2020 is at a depressed level. However, Air China Stock Price experienced multiple fluctuations during the past 5 years. Therefore, it indicates that the financial health of the company is not stable and is easily affected by external factors. Such as latest events and news about the company involved.

Follow up, I compared Air China Stock Price and S&P 500 airline industry Index. From the two graphs we can see that Air China did perform better compared to others in the whole industry after the pandemic as the industry index is going downwards and Air China index maintains at a constant and stable level. The trend among the above three indexes can be clearly seen from the percentage change scale like this.

Market research

Strength: 

• Successful track record of developing new products – product innovation.
• Automation of activities brought consistency of quality to Air China products and has enabled the company to scale up and scale down based on the demand conditions in the market.
• Superb Performance in New Markets – Air China has built expertise at entering new markets and making them. The expansion has helped the organization to build new revenue streams and diversify the economic cycle risk in the markets it operates in.
• Strong Brand Portfolio – Over the years, Air China has invested in building a strong brand portfolio. Furthermore, the SWOT analysis of Air China just underlines this fact. Consequently, this brand portfolio can be extremely useful if the organization wants to expand into new product categories.
• Highly successful at Go To Market strategies for its products.
• Strong dealer community – It has built a culture among distributors & dealers where the dealers not only promote the company’s products but also invest in training the sales team to explain to the customer how he/she can extract the maximum benefits out of the products.
• Strong distribution network – Over the years Air China has built a reliable distribution network that can reach the majority of its potential market.
• Good Returns on Capital Expenditure – Air China is relatively successful at execution of new projects and generated good returns on capital expenditure by building new revenue streams.

Weakness:

• Not very good at product demand forecasting leading to higher rate of missed opportunities compare to its competitors. One of the reasons why the day inventory is high compared to its competitors is that Air China is not very good at demand forecasting, therefore end up keeping higher inventory both in-house and in channel.
• Need more investment in new technologies. Moreover, given the scale of expansion and different geographies the company is planning to expand into, Air China needs to put more money into technology to integrate the processes across the board. Additionally, right now the investment in technologies is not at par with the vision of the company.
• Investment in Research and Development is below the fastest growing players in the industry. Even though Air China is spending above the industry average on Research and Development. It has not been able to compete with the leading players in the industry in terms of innovation. It has come across as a mature firm looking forward to bringing out products based on tested features in the market.
• High attrition rate in the workforce – compared to other organizations in the industry Air China has a higher attrition rate. And also has to spend a lot more compared to its competitors on training and development of its employees.
• The company has not been able to tackle the challenges presented by the new entrants in the segment and has lost small market share in the niche categories. Additionally, Air China has to build internal feedback mechanisms directly from the sales team on ground to counter these challenges.
• Not highly successful at integrating firms with different work cultures. As mentioned earlier even though Air China is successful at integrating small companies it has its share of failure to merge firms that have different work cultures.
• There are gaps in the product range sell by the company. This lack of choice can give a new competitor a foothold in the market.

Opportunities:

• Stable free cash flow provides opportunities to invest in adjacent product segments. With more cash in the bank, the company can invest in new technologies as well as in new products segments. This should open a window of opportunity for Air China in other product categories.
• The market development will lead to dilution of competitor’s advantage and enable Air China to increase its competitiveness compared to the other competitors.
• New trends in consumer behavior can open up a new market for Air China . Firstly, it provides a great opportunity for the organization to build new revenue streams and diversify into new product categories too.
• Economic uptick and increase in customer spending, after years of recession and slow growth rate in the industry. Also it is an opportunity for Air China to capture new customers and increase its market share.
• New customers from online channels – Over the past few years the company has invested vast sums of money into the online platform. This investment has opened a new sales channel for Air China. Additionally, in the next few years, the company can leverage this opportunity by knowing its customers better and serving their needs using big data analytics.
• Organization’s core competencies can be a success in similar other products. A comparative example could be – GE healthcare research helped it in developing better Oil drilling machines.
• Decreasing cost of transportation because of lower shipping prices can also bring down the cost of Air China products thus providing an opportunity to the company – either to boost its profitability or pass on the benefits to the customers to gain market share.
• The new technology provides an opportunity to Air China to practice differentiated pricing strategy in the new market. It will enable the firm to maintain its loyal customers with great service and, furthermore, lure new customers through other value-oriented propositions.

Threats:

• Rising raw material can pose a threat to Air China profitability.
• As the company is operating in numerous countries it is exposed to currency fluctuations especially given the volatile political climate in a number of markets across the world.
• Firstly, No regular supply of innovative products – Over the years the company has developed numerous products but those are often responses to the development by other players. Secondly, the supply of new products is not regular thus leading to high and low swings in the sales number over a period of time.
• Rising pay level especially movements such as $15 an hour and increasing prices in the China can lead to serious pressure on profitability of Air China
• The demand of the highly profitable products is seasonal in nature and any unlikely event during the peak season may impact the profitability of the company in the short to medium term.
• Growing strengths of local distributors also presents a threat in some markets as the competition is paying higher margins to the local distributors.
• New environment regulations under Paris agreement (2016) could be a threat to certain existing product categories.
• Moreover, new technologies developed by the competitor or market disruptor could be a serious threat to the industry in medium to long term future.

Limitations of SWOT Analysis for Air China:

Although the SWOT analysis is widely used as a strategic planning tool, the analysis does have its share of limitations.

• Certain capabilities or factors of an organization can be both a strength and weakness at the same time. This is one of the major limitations of SWOT analysis . For example, changing environmental regulations can be both a threat to a company. And it can also be an opportunity in a sense that it will enable the company to be on a level playing field or at advantage to competitors. If it is able to develop the products faster than the competitors.
• SWOT does not show how to achieve a competitive advantage, so it must not be an end in itself.
• The matrix is only a starting point for a discussion on how proposed strategies can be implemented. It provide an evaluation window but not an implementation plan based on strategic competitiveness of Air China
• SWOT is a static assessment – analysis of status quo with few prospective changes. As circumstances, capabilities, threats, and strategies change, although the dynamics of a competitive environment may not be revealed in a single matrix.
• SWOT analysis may lead the firm to overemphasize a single internal or external factor in formulating strategies. Additionally, there are interrelationships among the key internal and external factors that SWOT does not reveal that may be important in devising strategies.

Positioning of Air China — To be an internationally well-known airline

Moreover, Air China positioning, the objective of future development and the vision of Air China is to be an airline recognizes by mainstream customers, the most valuable and profitable airline in China and an internationally competitive airline.