Company Reports

The big three Chinese airlines we cover, Air China, China Southern Airlines, and China Eastern Airlines, either made losses or merely broke even in the first quarter. However, passenger traffic numbers have exceeded prepandemic levels. We attribute the results primarily to higher jet fuel prices, which, on average, were 39% higher than that in the first quarter of 2019. In addition, we believe overcapacity in the domestic market constrained the airlines' ability to transfer the increased jet fuel costs to passengers.

The big three Chinese airlines we cover, Air China, China Southern Airlines, and China Eastern Airlines, remained lossmaking in 2023. The announced net losses are all within the ranges of their preliminary guidance and hence are well expected. As international passenger traffic continues to recover, we project all three airlines to turn around in 2024 with CNY 4.9 billion net income for Air China, CNY 6.1 billion for China Southern, and CNY 1.0 billion for China Eastern. We keep our fair value estimates at HKD 6.40 (CNY 5.90) for Air China, HKD 4.70 (CNY 4.30) for China Southern, and HKD 2.58 (CNY 2.36) for China Eastern. Air China is our preferred pick among the three as we think it should benefit more from the rebound in business travel due to larger exposure to the premium market.

The preliminary 2023 results for the three Chinese airlines—Air China, China Eastern Airlines, and China Southern Airlines—fell short of our expectations, pointing to deep losses in the fourth quarter. As the passenger traffic is in line with our forecast, we think the miss is mainly due to lower-than-expected passenger yields and possibly also higher-than-expected costs. As such, we lower our 2023 earnings estimate by CNY 2.2 billion-CNY 6.6 billion. We now estimate CNY 1.1 billion losses for Air China, CNY 7.5 billion losses for China Eastern, and CNY 4.0 billion losses for China Southern. We keep our estimates for 2024 and beyond pending more information from the full results.

We view Air China’s proposed private placement of new A- and H-shares positively. Based on our estimate, the implied average issuance price will be about 8% above our current fair value estimate. Therefore, we think the placement is value-accretive. The up to CNY 6 billion and HKD 2 billion raised should help Air China manage its strained balance sheet while meeting capital expenditure needs. We keep our fair value estimates at HKD 6.40 per H-share and CNY 5.90 per A-share. Air China’s H-share price is 27% below our fair value estimate, but we prefer Cathay Pacific presently. We think Cathay is less exposed to slowing business travel in China and a depreciating Chinese yuan.

The three Chinese airlines we cover—Air China, China Southern Airlines, and China Eastern Airlines—all turned profitable in the third quarter on the back of strong summer travel demand. However, the profitability level is lower than expected. We believe the rising jet fuel price and falling international passenger yield weighed on earnings. After adjusting our fuel cost and passenger yield assumptions, we reduce our 2023 net income estimates by CNY 2.4 billion-CNY 5.2 billion for the three airlines. We now forecast CNY 1.1 billion net income for Air China, CNY 2.6 billion net income for China Southern, but CNY 3.0 billion net losses for China Eastern.

Air China operates a global route network that centers on hubs such as Beijing and Chengdu. It enjoys the highest yield compared with China Southern Airlines and China Eastern Airlines. We think this is largely attributable to its stronghold in Beijing, its main base. Air China used to control more than 40% of the market share at the world’s second busiest airport, Beijing Capital International Airport, or BCIA.

Although Air China, China Southern Airlines, and China Eastern Airlines continued to record losses in the second quarter, Air China and China Southern would have turned a profit if foreign exchange losses were excluded. With the busiest ever summer travel season in China just over, we think the three Chinese airlines will make strong profits in the third quarter. After revising our passenger traffic and yield estimates, we raise Air China's 2023 net income estimate by CNY 6.8 billion to CNY 3.4 billion. We keep China Southern's 2023 net income forecast at CNY 7.8 billion. We expect China Eastern to break even in 2023 compared with our original estimate of CNY 1.9 billion losses. Nonetheless, our fair value estimates remain HKD 6.50 for Air China, HKD 4.92 for China Southern and HKD 2.70 for China Eastern after factoring in higher fuel price assumptions for 2024-25. We think the H shares of China Southern are attractive at about a 15% discount to our fair value estimate. We suggest investors wait for better entry points for Air China and China Eastern.

Air China operates a global route network that centers on hubs such as Beijing and Chengdu. It enjoys the highest yield compared with China Southern Airlines and China Eastern Airlines. We think this is largely attributable to its stronghold in Beijing, its main base. Air China used to control more than 40% of the market share at the world’s second busiest airport, Beijing Capital International Airport, or BCIA.

We keep our earnings and fair value estimates for the three Chinese airlines—Air China, China Southern Airlines, and China Eastern Airlines—unchanged. As expected, all three remained lossmaking in the first quarter, but losses narrowed significantly year on year. We project the three airlines to turn around in the second quarter as passenger traffic rises and jet fuel prices soften. We keep our 2023 domestic capacity forecast at 107%-110% of 2019 levels and international capacity forecasts at 36%-45%. We project CNY 3.2 billion net loss for Air China, CNY 7.8 billion net profit for China Southern, and CNY 1.9 billion net loss for China Eastern. We value Air China at HKD 6.50 per share, China Southern at HKD 4.92, and China Eastern at HKD 2.70. Their H-shares closed 6%-14% above our fair value estimates as of April 28. We suggest investors wait for better entry points.

Air China and China Eastern Airlines’ record losses in the fourth quarter of 2022 were well expected, but we are slightly disappointed with management’s guidance. While the outlook for domestic travel is ahead of our expectations, international travel is sluggish. We raise our 2023 domestic capacity forecasts to 107%-109% of 2019 levels for the two airlines, but cut our international capacity forecasts to 43%-45% of 2019 levels. We estimate both will remain lossmaking in 2023 with CNY 3.2 billion net loss for Air China and CNY 1.9 billion net loss for China Eastern. This contrasts with our CNY 7.8 billion profits estimate for China Southern, primarily as a result of China Southern’s larger exposure to the domestic market.

The three Chinese airlines—Air China, China Southern Airlines, and China Eastern Airlines—are set for a strong recovery in 2023 as China reopens its border. The move to end international travel restrictions came two quarters ahead of our expectations. As such, we have raised our international capacity forecast to about 65% of 2019 levels in 2023 from about 35% in our original forecast. We think Cathay Pacific should also benefit from a faster resumption of flights with the mainland, and hence we increase our 2023 seat capacity forecasts to 60% of 2019 levels from 55%. We expect the three Chinese airlines to remain in the negative, with losses ranging from CNY 0.4 billion to CNY 3.7 billion in 2023, but we expect Cathay to turn around with HKD 6.4 billion net income.

Air China operates a global route network that centers on hubs such as Beijing and Chengdu. It enjoys the highest yield compared with China Southern Airlines and China Eastern Airlines. We think this is largely attributable to its stronghold in Beijing, its main base. Air China used to control more than 40% of the market share at the world’s second busiest airport, Beijing Capital International Airport, or BCIA.

The three Chinese airlines we cover—Air China, China Southern Airlines, and China Eastern Airlines—reacted positively on the news of the Chinese government cutting the inbound quarantine days with their H-share prices up 2%-5% on Nov. 11, 2022. While we do not predict a significant boost to travel recovery from this policy change, we think the relaxation marks a positive step toward eventual transition to living with COVID-19. We keep our base-case assumption that China will meaningfully ease its zero-COVID policy in the second half of 2023. We note upsides to our 2023 earnings estimates if China opens the border after the Lunar New Year, as per recent management guidance from Asia aviation industry peers. This may bring capacity rebound one quarter ahead of our current estimates. However, we are more comfortable with our current assumptions given the time required to prepare for reopening such as mass vaccination and medical resources ramp-up. As such, we retain our fair value estimates for all the Chinese airlines. The shares are all trading around or above our fair value estimates. We suggest investors wait for better entry points.

As expected, the three Chinese airlines we cover—Air China, China Southern Airlines, and China Eastern Airlines— reported another quarter of huge losses, ranging from CNY 6.1 billion to CNY 9.4 billion. With borders remaining closed and domestic cities under constant lockdowns, heavy losses are set to continue. We have increased our 2022 loss estimates to CNY 39.1 billion for Air China, CNY 24.8 billion for China Southern, and CNY 35.4 billion for China Eastern. In addition, we expect all three airlines to remain in the negative in 2023. We cut our fair value estimates by 8%-12% for the three airlines primarily due to the depreciation of the yuan against the Hong Kong dollar. We now value Air China at HKD 5.60, China Southern at HKD 4.36, and China Eastern at HKD 2.30. The shares of the three airlines are mostly trading around or above our fair value estimates. For investors looking to trade on travel recovery, we think Singapore Airlines is a better pick.

Air China operates a global route network that centers on hubs such as Beijing and Chengdu. It enjoys the highest yield compared with China Southern Airlines and China Eastern Airlines. We think this is largely attributable to its stronghold in Beijing, its main base. Air China used to control more than 40% of the market share at the world’s second busiest airport, Beijing Capital International Airport, or BCIA.

The three Chinese airlines we cover—Air China, China Southern Airlines, and China Eastern Airlines—all reported the largest quarterly losses since the pandemic, ranging from CNY 7 billion to CNY 11 billion. With borders remaining closed and domestic cities under constant lockdowns, heavy losses are set to continue in the second half. We have increased our 2022 loss estimates to CNY 37.7 billion for Air China, CNY 18.1 billion for China Southern, and CNY 28.9 billion for China Eastern. In addition, we expect all three airlines to remain in the negative in 2023.

Air China operates a global route network that centers on hubs such as Beijing and Chengdu. It enjoys the highest yield compared with China Southern Airlines and China Eastern Airlines. We think this is largely attributable to its stronghold in Beijing, its main base. Air China used to control more than 40% of the market share at the world’s second busiest airport, Beijing Capital International Airport, or BCIA.

Air China operates a global route network that centers on hubs such as Beijing and Chengdu. It enjoys the highest yield compared with China Southern Airlines and China Eastern Airlines. We think this is largely attributable to its stronghold in Beijing, its main base. Air China used to control more than 40% of the market share at the world’s second busiest airport, Beijing Capital International Airport, or BCIA.

The three Chinese airlines we cover—Air China, China Southern Airlines, and China Eastern Airlines—were hit hard by the lockdown in Shanghai and other domestic cities. All three airlines saw heavier losses year over year in the first quarter. With the international market almost wiped out and the domestic market also at stake, losses are set to deepen. We now forecast 2022 full year losses of CNY 20.3 billion for Air China, CNY 15.8 billion for China Eastern and CNY 14.4 billion for China Southern. Our long-term earnings estimates are unchanged. We keep our fair value estimates at HKD 6.50 for Air China, HKD 5.50 for China Southern, and HKD 2.80 for China Eastern. The H-shares of the three airlines are trading at about 5%-20% discounts to our fair value estimates. For investors looking to trade on travel recovery, we think luggage company Samsonite is a better choice from a risk/reward perspective. Among the three airlines, we think China Southern offers better risk/reward. It is the only one that saw year-over-year revenue growth and positive operating cash flow in the quarter thanks to bigger domestic exposure.

As expected, all the three Chinese airlines we cover--Air China, China Southern Airlines, and China Eastern Airlines--saw deeper losses in the fourth quarter of 2021. Revenue was sluggish due to travel restrictions amid COVID-19 resurgence across the country. This will probably extend into 2022 as we think the zero-COVID policy will continue. After factoring in a slower travel recovery and higher fuel prices in 2022, we now forecast losses of CNY 9 billion-CNY 16.9 billion, compared with CNY 6.2 billion-CNY 8.3 billion losses in our original estimates. Our fair value estimates are unchanged at HKD 6.50 for Air China, HKD 5.50 for China Southern, and HKD 2.80 for China Eastern. The H-shares of the three airlines are trading at about 5%-15% discounts to our fair value estimates. For investors looking to trade on travel recovery, we think luggage company Samsonite is a better choice from a risk/reward perspective.