Wings clipped by more frequent lockdowns and jet fuel prices
• Omicron and jet fuel prices are significant headwinds for the Chinese airline sector
• Another year of substantial losses for the Chinese airlines could lead to raising of more equity capital
• Downgrade Air China and CEA to HOLD with lower TPs; maintain BUY on CSA with lower TP
Slashing FY22/23F earnings estimates. We expect the Chinese airlines to post significant losses again in FY22F before finally returning to the black in early FY23F. FY22F will be a particularly challenging year, given the confluence of headwinds in the form of the blazing rally in jet fuel prices (especially since all three airlines are completely unhedged) and limited improvement in passenger traffic, as international borders will likely remain closed until 2023 and more infectious variants like Omicron will lead to a higher
rate of lockdowns of Chinese cities.
The Chinese flag carriers might need to raise more equity capital. Credit metrics for the three Chinese airlines could become unsustainable after another year of substantial losses. China Southern Airlines (CSA) has already announced plans to raise more equity capital, while Air
China and China Eastern Airlines (CEA) could follow suit shortly. Air China, in particular, has not raised equity capital since the pandemic began, and appears to be in need of equity capital to bolster its battered balance sheet.
Turning neutral on Chinese airlines; CSA is our only BUY call at this juncture. We are downgrading Air China and CEA to HOLD with lower TPs of HK$5.20 and HK$2.80, respectively, but keeping a BUY call on CSA, though with a lower TP of HK$5.10. We are less positive about Air China, given its relatively higher exposure to the international travel market, and sluggish turnaround at key associate Cathay Pacific. Although the temporary grounding of CEA’s B737- 800 aircraft is not a serious issue, we believe that the airline’s recent aviation accident could cause some reputational damage and lead to consumers avoiding CEA for a while. Finally, we believe that CSA will perform better than its peers again in FY22F because of its commanding position in the domestic market and tighter cost control.