• Rampant Omicron outbreak will impede air travel in 1H2022; cross-border travel especially at risk
  • Sustained vaccine rollout and better treatment options should enable a turnaround in 2H2022
  • Market appears to have priced in an excessively pessimistic scenario, but we acknowledge uncertainty will weigh on the sector in the interim
  • Maintain BUY on the Chinese carriers; downgrade Cathay Pacific to FULLY VALUE.

Omicron presents a daunting challenge for airlines in 1H2022, but there are reasons to be hopeful about 2H2022/2023.  Airlines are in for another difficult period in 1H2022 because of challenges wrought by the highly contagious Omicron variant and the swift ascent in jet fuel prices. However, we see a positive turnaround taking place in 2H2022, as the link between new cases and severe illness fade as countries continue to ramp up vaccinations (including booster shots), and effective treatment options become more widely accessible. We believe that airlines under our coverage will spill red ink again in 2022 because of a sluggish 1H2022 and cost pressures stemming from inflation and the swift ascent in crude oil/jet fuel prices. Fortunately, the pain inflicted by Omicron should largely be confined to 1H2022, and the sector should finally turn a profit in 2023. 

Investors might be too spooked by Omicron; valuation of Chinese airlines imply an extended outbreak well into 2023. While the share prices of the three Chinese carriers may have recouped losses since news of Omicron first emerged, valuations are still undemanding at -0.5 to -1.0 standard deviation below their five-year averages on a P/BV basis. Our revised TPs on the three Chinese airlines after factoring negative earnings revision on a fairly conservative recovery profile still indicate comfortable upside. However, we are likely to see increased share price volatility for a while, as there are still several unknowns about Omicron. Meanwhile, we are downgrading Cathay Pacific (CX) to FULLY VALUED, as we believe Omicron will result in a more protracted path to profitability for CX owing to Hong Kong’s strict COVID-zero policy and relatively slow vaccine uptake in the country.