China Transportation_ Airlines_ Downward pressure in 4Q24 with larger airfare pullback; policy stimulus and FX fluctuations remain focus

Summary of the Conference Call on China Transportation: Airlines Industry Overview - The focus is on the Chinese airline industry, particularly the performance and outlook for major airlines such as Air China, China Eastern Airlines, China Southern Airlines, and Spring Airlines [2][4][46]. Key Insights and Core Arguments 1. Airfare Trends: - A significant decline in domestic airfare is expected, with a forecasted drop of -15% YoY in 4Q24, bringing airfares to only 80% of 2019 levels post National Day holiday [2][4]. - The weak performance in airfares is attributed to seasonality, weak business travel, and oversupply in the domestic market [2][4]. 2. Passenger Traffic Growth: - Domestic passenger traffic is projected to grow by 11% YoY in 2024, reaching 113% of 2019 levels, with a further 6% growth expected in 2025 [3][4]. - International passenger traffic is forecasted to recover to 95% of 2019 levels in 4Q24, with a full-year estimate of 87% [5][6]. 3. Cost Management: - Most Chinese airlines have successfully reduced unit costs in 3Q23, with Air China, China Eastern Airlines, and Spring Airlines showing reductions of -2%, -6%, and -1% YoY respectively [7]. - Spring Airlines demonstrated strong cost control with a non-fuel unit cost reduction of -2% compared to 2019 [7]. 4. Policy Impact: - Policy stimulus is expected to improve market sentiment and potentially boost business travel demand [2]. - The removal of restrictions on China-Canada flights by the Canadian government is anticipated to alleviate domestic oversupply and benefit airlines like Air China [6]. 5. Profitability Outlook: - The forecast for airline profitability is mixed, with Air China expected to benefit from business travel improvements, while China Eastern Airlines and China Southern Airlines face challenges [2][8]. - Revised net earnings forecasts for 2024-26 show a significant reduction for Air China and China Eastern Airlines, with Air China’s net earnings revised down by -98% for 2024 [8]. Additional Important Points 1. Exchange Rate Risks: - Fluctuations in the RMB/USD exchange rate could impact earnings, with Air China and China Southern Airlines reporting significant FX gains in 3Q24 [7]. - Spring Airlines has a relatively neutral exposure to FX risks, which may provide a competitive advantage [7]. 2. Valuation and Target Prices: - Target prices for major airlines have been adjusted, with Air China (A/H) set at Rmb7.1/HKD5.5, China Eastern Airlines (A/H) at Rmb4.3/HKD3.0, and Spring Airlines at Rmb64.5 [8][44][52][55]. - The valuation methodologies for these airlines are based on P/B ratios, reflecting their expected recovery and market conditions [44][48][52][55]. 3. Investment Ratings: - Air China is rated as a Buy, while China Southern Airlines is rated as Sell for its A shares and Neutral for its H shares [50][54][57]. - Spring Airlines is viewed positively due to its growth potential and cost advantages in the low-cost carrier segment [47]. 4. Risks to Forecasts: - Key risks include macroeconomic uncertainties, slower-than-expected recovery in travel demand, and potential tariff hikes affecting profitability [46][50][54][57]. This summary encapsulates the critical insights and projections regarding the Chinese airline industry as discussed in the conference call, highlighting both opportunities and challenges faced by the sector.