Our Hong Kong/China Transportation & Infrastructure Analyst
Qianlei Fan explains why a resurgence in air travel is leading
China’s emergence from deflation.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Qianlei Fan, Morgan
Stanley’s Hong Kong/China Transportation Analyst. Chinese
airlines are at a once-in-a-decade inflection point, and today
I’ll break down the elements of this turnaround story.
It’s Thursday, Feb 6th at 10am in Hong Kong.
Last week, hundreds of millions of people across Asia gathered to
celebrate the lunar new year with their families. I was one of
them and took a flight back to my hometown Nanjing. Airports were
jam-packed for days, with air travel expected to exceed 90
million trips.
It’s all indicative of Chinese airlines making a comeback after a
seven-year run of underperformance. In fact, we believe Airlines
will be one of the first industries to emerge from China's
deflationary pressures this year. And this has
implications for the country's broader economy.
Although COVID impacted Airlines globally, other regions have
since recovered. In China, the earnings recovery is just
beginning. Since 2018, Chinese Airlines have experienced demand
hits from the trade tension, currency depreciation, COVID-19, and
post-COVID macro headwinds.
It’s been two years since Chinese borders lifted restrictions and
air travelers are returning in force. Excess capacity has now
been digested. Slower deliveries of aircrafts continue to limit
supply, and it is more difficult for airlines to get new aircraft
and increase their available seats. Passenger load factors will
continue to strengthen this year, which means the airlines are
running close to full capacity. This will increase Airlines'
pricing power within the next 6 to 12 months, feeding through to
earnings.
If we put that in a global context, China’s airlines industry
handled around 700 million passengers in 2024, 8 per cent of
global air passengers; but that 700 million passengers only
account for half of China’s population. In the US, air passenger
numbers can be three times its population.
Chinese airlines have just reached break-even in the past year,
while many of their global peers have already generated robust
profits. Chinese Airlines’ earnings and valuations have
lagged global peers in both absolute and relative terms. But now,
with a turnaround coming into view, Chinese Airlines have a
longer runway for stronger earnings growth and share price
performance than global peers.
What’s more, the August 2024 turnaround in US airlines offers
several key takeaways for China. US Airlines’ share prices
recovered last year, following a long period of underperformance
post COVID. The wait before the inflection was long, but share
prices moved up quickly once the turning point was reached, and
valuation expanded ahead of earnings recovery. Big US airlines
outperformed smaller players during the most recent rally. We
think all these are relevant to the Chinese Airlines story.
If we look at earnings – Chinese Big Three airlines reached
breakeven in 2024, making a small profit in 2025, and that profit
will double in 2026. But that’s not yet the peak of the cycle;
peak cycle earnings could again double the 2026 level, probably
in 2027 to 2028. That’s the reason why we think Chinese airlines
are on the path to doubling share prices.
To sum up, Chinese Airlines represent a once-in-a-decade
opportunity for investors. With strengthened passenger load
factors and a positive demand outlook, coupled with significant
potential for earnings growth, this industry looks ready for
takeoff.
Thanks for listening. If you enjoy the show, please leave us a
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a friend or colleague today. For those who celebrate – 新春快乐，恭喜发财！
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