Company Reports

After factoring in lower passenger yield and higher jet fuel cost assumptions, we cut our fair value estimates by 31%-40% for the three Chinese airlines, namely, Air China, China Southern Airlines, and China Eastern Airlines. Although the airlines’ net losses in the first half align with their preliminary guidance, passenger yield declined more than we anticipated. The Chinese airline industry is fiercely competitive, and passenger yields have been on a downtrend for more than a decade. We do not see a structural tailwind to reverse the trend. Therefore, we reduce our passenger yield assumptions through 2028. For 2024, we project Air China to just break even, China Southern to turn around with a CNY 2.8 billion net profit, and China Eastern to make a CNY 3.5 billion net loss. We now value Air China at HKD 3.85 (CNY 3.54), China Southern at HKD 2.92 (CNY 2.69), and China Eastern at HKD 1.79 (CNY 1.65). We think the H-shares are fairly valued, and the A-shares are expensive.

Despite being the largest airline in China, China Southern Airlines has long been disadvantaged among the Big Three Chinese airlines. Compared with Air China and China Eastern Airlines, each holding Beijing and Shanghai markets, China Southern primarily operates out of Guangzhou. Guangzhou attracts a lower percentage of business traffic than Beijing and Shanghai. Besides, Guangzhou as an aviation hub in the Greater Bay Area faces intense competition from Shenzhen and Hong Kong, while Beijing and Shanghai each dominate their respective region. As a result, China Southern’s passenger yields have been the lowest among the three Chinese airlines.

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.

Despite being the largest airline in China, China Southern Airlines has long been disadvantaged among the Big Three Chinese airlines. Compared with Air China and China Eastern Airlines, each holding Beijing and Shanghai markets, China Southern primarily operates out of Guangzhou. Guangzhou attracts a lower percentage of business traffic than Beijing and Shanghai. Besides, Guangzhou as an aviation hub in the Greater Bay Area faces intense competition from Shenzhen and Hong Kong, while Beijing and Shanghai each dominate their respective region. As a result, China Southern’s passenger yields have been the lowest among the three Chinese airlines.

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.

Despite being the largest airline in China, China Southern Airlines has long been disadvantaged among the Big Three Chinese airlines. Compared with Air China and China Eastern Airlines, each holding Beijing and Shanghai markets, China Southern primarily operates out of Guangzhou. Guangzhou attracts a lower percentage of business traffic than Beijing and Shanghai. Besides, Guangzhou as an aviation hub in the Greater Bay Area faces intense competition from Shenzhen and Hong Kong, while Beijing and Shanghai each dominate their respective region. As a result, China Southern’s passenger yields have been the lowest among the three Chinese airlines.

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.

Despite being the largest airline in China, China Southern Airlines has long been disadvantaged among the Big Three Chinese airlines. Compared with Air China and China Eastern Airlines, each holding Beijing and Shanghai markets, China Southern primarily operates out of Guangzhou. Guangzhou attracts a lower percentage of business traffic than Beijing and Shanghai. Besides, Guangzhou as an aviation hub in Greater Bay Area faces intense competition from Shenzhen and Hong Kong, while Beijing and Shanghai each dominate their respective region. As a result, China Southern’s passenger yields have been the lowest among the three Chinese airlines.

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.

China Southern Airlines’ record loss in the fourth quarter of 2022 is well expected, but we are slightly disappointed with management’s mixed guidance. While the outlook for domestic travel is ahead of our expectation, the international travel outlook is sluggish. We raise our 2023 domestic capacity forecast to about 110% of the 2019 level, but cut our international capacity forecast to 36% of 2019's level, from 85% and 65%, respectively. We now estimate CNY 7.8 billion in net income in 2023, up from CNY 0.4 billion in losses in our prior estimate, primarily due to a higher domestic passenger yield assumption. Our fair value estimate remains HKD 4.92. The H-share price is currently 11% above our fair value estimate. We think Tongcheng Travel is a better pick if investors would like exposure to the domestic travel recovery in China.

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.

Despite being the largest airline in China, China Southern Airlines has long been disadvantaged among the Big Three Chinese airlines. Compared with Air China and China Eastern Airlines, each holding Beijing and Shanghai markets, China Southern primarily operates out of Guangzhou. Guangzhou attracts a lower percentage of business traffic than Beijing and Shanghai. Besides, Guangzhou as an aviation hub in Greater Bay Area faces intense competition from Shenzhen and Hong Kong, while Beijing and Shanghai each dominate their respective region. As a result, China Southern’s passenger yields have been the lowest among the three Chinese airlines.

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.

Despite being the largest airline in China, China Southern Airlines has long been disadvantaged among the Big Three Chinese airlines. Compared with Air China and China Eastern Airlines, each holding Beijing and Shanghai markets, China Southern primarily operates out of Guangzhou. Guangzhou attracts a lower percentage of business traffic than Beijing and Shanghai. Besides, Guangzhou as an aviation hub in Greater Bay Area faces intense competition from Shenzhen and Hong Kong, while Beijing and Shanghai each dominate their respective region. As a result, China Southern’s passenger yields have been the lowest among the three Chinese airlines.

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.

Despite being the largest airline in China, China Southern Airlines has long been disadvantaged among the Big Three Chinese airlines. Compared with Air China and China Eastern Airlines, each holding Beijing and Shanghai markets, China Southern primarily operates out of Guangzhou. Guangzhou attracts a lower percentage of business traffic than Beijing and Shanghai. Besides, Guangzhou as an aviation hub in Greater Bay Area faces intense competition from Shenzhen and Hong Kong, while Beijing and Shanghai each dominate their respective region. As a result, China Southern’s passenger yields have been the lowest among the three Chinese airlines.

Despite being the largest airline in China, China Southern Airlines has long been disadvantaged among the Big Three Chinese airlines. Compared with Air China and China Eastern Airlines, each holding Beijing and Shanghai markets, China Southern primarily operates out of Guangzhou. Guangzhou attracts a lower percentage of business traffic than Beijing and Shanghai. Besides, Guangzhou as an aviation hub in Greater Bay Area faces intense competition from Shenzhen and Hong Kong, while Beijing and Shanghai each dominate their respective region. As a result, China Southern’s passenger yields have been the lowest among the three Chinese airlines.