The Zhitong Finance App learned that Cinda Securities released a research report stating that rail and civil aviation travel have become the most important medium- and long-distance passenger travel methods in China. Compared with the core factors of railway passenger transport and air passenger transport: In terms of profit model, the revenue and costs of railway passenger transport companies are highly controllable and relatively stable, and there are many factors influencing the revenue and costs of air passenger transport companies; travel mileage is the core factor in dividing the competitive advantages of railways and aviation. The 150-800 km section is basically dominated by high-speed rail, and the distance above 1,200 km is dominated by civil aviation. Additionally, due to limited income levels, travelers who travel longer distances may be willing to sacrifice longer travel time in exchange for more affordable travel expenses. Overall, railway passenger transport is currently developing faster than air transport, and there is more room for medium- to long-term air passenger transport development.

Railway and civil aviation travel have become the most important medium- and long-distance passenger travel methods in China. From 1978 to 2023, the compound annual growth rate of total passenger turnover reached 6.4%, with railway/civil aviation turnover growth rates of 5.9%/14.0% respectively. High-speed rail travel in railways reached an average annual compound annual growth rate of 75.8% from 2008 to 2019, far higher than the 6.0% railway growth rate during the same period. In terms of passenger traffic, the share of railway passenger traffic has increased rapidly since 2012, from 5.0% to 41.4%; civil aviation accounts for only 6.7% of passenger traffic. In terms of turnover, by 2023, the share of railway turnover increased to 51.5%, and the share of civil aviation rose to second place, reaching 36.0%.

Overview of railway passenger transport: The scale of the road network continues to improve, and there is room for growth in volume and price.

1) Industrial structure: The operation and management of the railway network is highly concentrated, and the high-speed rail network continues to expand. The railway industry is dominated by government departments. The National Railway Administration (administrative function) and the Railway Corporation (enterprise function, China Railway Group) jointly plan and arrange railway passenger transportation work. Most of the railway engineering construction and equipment manufacturing are carried out by state-owned enterprises under the State Assets Administration Commission. The railway network is the main framework for a four-vertical and four-horizontal high-speed rail passenger transport network, connecting major cities, and will be fully completed in 2021; the “eight vertical and eight horizontal” high-speed rail network is being encrypted and formed, and the high-speed rail already covers 92% of the country's cities with a population of 0.5 million or more.

2) Fare mechanism: Railway speed has increased, and ticket price marketization continues. Domestic high-speed rail lines can be divided into three categories: main lines, regional links, and other intercity railways. Most of the lines with a speed of 300 to 350 kilometers per hour are long-distance lines, connecting many provincial capitals and large urban agglomerations; most of the lines with a speed of 200 to 250 kilometers per hour are regional intercity lines. Since 2016, the right to price passenger fares for high-speed rail trains has been transferred from government departments to the former Railway Corporation, and a floating fare mechanism has gradually been implemented, but the overall fare level is still low.

3) Passenger flow demand: There is still room for improvement in railway network density, and the high growth rate of high-speed rail traffic is expected to continue. In terms of railway network density, taking the situation in 2021 as an example, China's railway line density is about 10 to 25 km/1000 square kilometers, which is less than that of Japan, South Korea and Europe. In terms of passenger flow density, the overall average domestic high-speed rail passenger flow density has increased from 2.23 million in 2008 to over 23 million, which is about double the passenger flow density of European high-speed rail traffic, but it is still only two-thirds of the passenger flow density of the entire Japanese Shinkansen system network.

4) Construction costs: The average cost of domestic high-speed rail construction is lower than that of foreign countries, and the investment amount maintains a high base. State-owned enterprises are mostly responsible for the high-speed rail supply chain. The higher the speed, the higher the cost of line construction; before 2019, the average annual fixed investment amount of railways remained at 800 billion. In terms of high-speed rail line construction costs, the average cost of a two-way track high-speed rail line with a speed of 350 kilometers per hour is about 0.139 billion yuan/km, which is at least 40% lower than the construction cost in Europe. For the same line, the standard cost of using a track speed of 350 kilometers per hour is 10% to 30% higher than the cost of using a speed of 250 kilometers per hour.

Overview of air passenger transport: Fares are highly marketable, and there is great potential for subsequent passenger growth.

1) Industrial structure: The Civil Aviation Administration of China is responsible for development plans in the field of civil aviation and supervises airlines and airports. The structure of China's civil aviation industry includes various aspects such as air transportation, services, manufacturing, and infrastructure. The Civil Aviation Administration of China is responsible for civil aviation affairs and plans, supervises and services domestic civil aviation activities. The three major airlines provide air transportation services and control many local airlines; aviation manufacturers have state-owned enterprises, overseas manufacturers, and the overseas manufacturers' industrial supply chains are relatively mature.

2) Fare mechanism: The market-based reform of air fares continues, and air ticket prices have been raised in too many rounds. Since 2004, domestic fare control has been liberalized, more and more routes have begun to implement market-based pricing, and the proportion of routes that have implemented market price adjustments has increased, and the overall fare for the route has increased significantly. From December 2014 to November 2020, the proportion of domestic routes subject to market price adjustments increased from 13.8% to 36.2% of all domestic routes in that year. Looking at the specific route price situation, in 2017-2023, after many rounds of price increases, the cumulative increase in ticket prices for major commercial routes was over 70%, and the market-based fare reform continued to deepen.

3) Demand space: There is great potential for subsequent growth in air passenger traffic. From 2006 to 2019, China's civil aviation passenger traffic increased from 0.16 billion to 0.66 billion, with an average annual growth rate of 11.5%. According to the “Global Market Forecast (2023-2042)” issued by Airbus, global passenger demand is expected to grow at an average annual rate of +3.6% over the next 20 years, and China's annual growth rate will reach 5.2%, which is above the global average. Meanwhile, the number of flights per capita in China is expected to increase from 0.5 in 2019 to 1.7 in 2042. (In 2019, the number of flights per capita in China was only 0.47. Compared to the world average 0.87 times and the US 2.48 times).

4) Expansion costs: The average cost level of airports is lower than that of high-speed rail lines. In terms of airport costs, prices vary according to geographical location, airport size, design standards, etc. Among the newly built airports, the civil aviation investment at Beijing Daxing Airport reached 116.7 billion yuan; the cost of Chengdu Tianfu International Airport was about 75 billion yuan; the investment for a single airport in the western region was about 1 billion yuan, which is equivalent to the price of more than 10 kilometers of high-speed rail. In terms of aircraft purchase prices, airline purchase prices usually have corresponding discounts. Referring to the previous aircraft purchase announcements of the three major airlines, the average price of purchasing the A320neo is about 0.128 billion US dollars/aircraft, which is equivalent to about 0.88 billion yuan.

Comparison of core factors of railway passenger transport and air passenger transport

1) Profit model comparison: The revenue and costs of railway passenger transport companies are highly controllable and relatively stable; there are many factors affecting the revenue and costs of air passenger transport companies.

2) Travel mileage is a core factor in the division of competitive advantages of railways and aviation: China's high-speed rail travel distance can exceed 1,000 kilometers; the 150-800 km section is basically dominated by high-speed rail travel methods; in the 800-1200 km range, civil aviation and high-speed rail have a fierce competitive relationship; and for distances over 1200 kilometers, civil aviation travel is dominated.

3) The level of disposable income per capita affects the choice of travel mode. Due to income level restrictions, travelers who travel a long distance may be willing to sacrifice longer travel time in exchange for more affordable travel expenses, and this factor has a large impact on the way travelers choose to travel.

Core conclusion: Currently, railway passenger transport is developing faster than air transport, and there is more room for medium- to long-term air passenger transport development

Investment suggestions: Optimistic about the continued recovery of air and high-speed rail travel. It is recommended to focus on Air China (601111.SH), China Southern Airlines (600029.SH), Spring Airlines (601021.SH), Juneyao Airlines (), China Eastern Airlines (Dubai), and the Beijing-Shanghai High Speed Rail (Sichuan). 603885.SH 600115.SH 601816.SH

Risk factors: The recovery in travel demand fell short of expectations, the recovery of international routes fell short of expectations, the risk of a sharp rise in oil prices, the risk of a sharp devaluation of the RMB, and increased risk of industry competition.