Airlines

China’s Big 3 Airlines to report weaker 3Q17 results but benign 4Q17 capacity to lift yields

China’s Big 3 Airlines just reported their 9M17 operating statistics, reflecting more moderate passenger traffic growth of 10% from 11% in 1H17. This was flagged in our previous report on 18 July 2017. As China’s Big 3 Airlines’ share prices have corrected 19% since July 2017, weakness in the upcoming 3Q17 results are already largely priced in. We now turn our focus on analysing the Chinese airlines’ 4Q17 capacity growth & their implications on the airlines’ yields and profitability.

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Research Report: Chinese Airports (694:HK, 600009:CH) may see near-term price correction

China – Following the Chinese airports’ share price rally of 40% ytd, we see a rising risk of share price correction near term. Based on our analysis of the airlines’ planned flights schedules for 4Q17, the total number of flights and seat capacity handled at Shanghai International Airport (600009:CH) will decline in 4Q17 while Beijing Capital International Airport (694:HK) will see limited capacity growth.

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Potential Emirates & Etihad alliance will form the world’s largest airline

Middle East – Emirates’ President Tim Clark commented yesterday that Emirates, following the establishment of its extensive partnership with flydubai, is open to cooperating with Etihad. We analyse what an alliance of these two major Gulf carriers could potentially look like. Combining Dubai-based Emirates and Abu Dhabi-based Etihad will form the world’s largest passenger and cargo airline …..

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Singapore Airlines can unlock value by merging SIA Engineering w/ ST Aerospace to form MRO Powerhouse

Global – Singapore Airlines can unlock value significantly via a partial or complete divestment of SIA Engineering that would yield Singapore Airlines’ shareholders a dividend in specie of S$0.81 to S$2.34 per SIA share. While highly speculative at this juncture, we believe that a merger between SIA Engineering and ST Engineering (STE:SP)’s Aerospace division (ST Aerospace) will be highly beneficial to all parties …

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Key Takeaways from AirAsia (AIRA:MK) Investor Day 2017

Malaysia – We attended AirAsia (AIRA:MK)’s inaugural Global Investor Day where we caught up with AirAsia Group’s CEO, Tony Fernandes as well as the CEOs of AirAsia’s associate airlines. Here are our key takeaways on what was featured as well as our verdicts on what is achievable or overambitious:

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Air France AF66 engine explosion to drive checks on A380s powered by GP7200 engines

Global – Air France AF66’s uncontained engine explosion will drive engine checks on Airbus A380s powered by the GP7200 engines. This is negative for manufacturer Engine Alliance, a JV between General Electric and Pratt & Whitney. Detailed GP7200 engine checks will be especially disruptive for Emirates which operates by far the the world’s largest A380 fleet. As many as 90 Emirates A380s are powered by the GP7200 engines. The GP7200-powered Airbus A380s account for 35% of Emirates’ total aircraft fleet and 45% of Emirates’ total seat capacity …

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Rising oil price impact analysis on all 33 listed airline equities in the Asia Pacific

Asia Pacific – Jet fuel prices have increased 24% y/y ytd, negatively impacting the airlines in the Asia Pacific as fuel cost is their single largest cost component, accounting for 30% of their total operating cost on average. We analyse all 33 listed airline equities in the Asia Pacific to assess their varying level of fuel hedging as well as their earnings sensitivity and share price correlation to jet fuel price movements. 

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AirAsia (China) adds partners but lack of Henan govt stake raises risk of other entrants

China – AirAsia Bhd (AIRA:MK) announced new partners for its proposed Zhengzhou-based LCC JV, AirAsia (China). The addition of Plato Capital Limited (PLC:SP) will increase AirAsia’s management influence in this joint venture airline as AirAsia Group Founders each have a 6.33% indirect stake in Plato Capital. AirAsia will still have a working relationship with the Henan Government Working Group under the original MoU signed in May 2017 but the absence of a direct equity stake  by the Henan provincial government …

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Record year for global air cargo market to benefit Asian airlines and MRO players

Global – We expect the global air cargo market to remain strong. Asia Pacific carriers w/ the largest cargo exposure are China Airlines, Korean Air, Cathay Pacific and EVA Airways. Supply growth will be a moderate 3-4% in the next 5 years. The stronger market, coupled w/ low fuel prices, may revive passenger-to-freighter conversions which will benefit MRO players ST Engineering, SIA Engineering and HAECO.

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Airline Industry impact analysis from North Korea’s thermonuclear test and geopolitical tensions

Asia Pacific – North Korea’s thermonuclear test on Sunday has heightened geopolitical tensions in the Korean Peninsula and the broader Asia Pacific region. This escalating tensions could drive travellers to postpone or cancel their trips to South Korea which is a popular tourist destination. This will hurt Korean Air, Asiana as well as Southeast Asian airlines AirAsia X, Vietnam Airlines and VietJet the most.

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Air China’s lagging share price to recover as 1H 2017 core operating profit margin beats peers

China – Based on the Big 3 Chinese carriers’ 1H 2017 results, Air China (753:HK) has once again delivered the strongest core operating profit margin, followed by China Eastern Airlines (670:HK) and China Southern Airlines (1055:HK). Air China also suffered the smallest decline in core operating margins y/y in 1H 2017. This could drive investors to revisit Air China as it has been the second worst performing stock among the Chinese airlines in the past 2 months.

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1H 2017 Earnings Preview: Air China (753:HK), China Eastern (670:HK), China Southern (1055:HK)

China – We expect the Chinese airlines to report weak 1H 2017 financial results. Our full year 2017 EPS forecasts are 30% below consensus. The market is likely to revise down earnings forecasts after their results announcements next week. As the Chinese airline stocks have already underperformed since end June 2017 and valuations are undemanding, the weak 1H 2017 financial results may not necessarily …

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Cathay Pacific (293:HK) 1H17 loss hits HK$2.05B: Potential Air China takeover could still drive rally

Hong Kong – Cathay Pacific reported a net loss of HK$2.05B , its largest 1H loss in history. We expect Cathay Pacific to remain loss-making in 2H17 but turn around from 2018. We recently upgraded Cathay Pacific from Underperform to Outperform as we believe much of Cathay’s weak earnings outlook is already priced in and its recovery from next year and a potential takeover by Air China could drive its valuations higher.

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Research Report: Japan Airlines (9201:JP) offers more upside than ANA (9202:JP)

Japan – We initiate coverage of ANA (9202:JP) and JAL (9201:JP) with Outperform ratings and Fair Values of JPY450 and JPY4222 respectively. JAL has historically traded at a 35% valuation premium to ANA in the past 5 years. However, this gap has closed recently, mainly driven by ANA’s improving profitability. We expect both carriers’ operating outlook to be broadly favourable with fuel price and forex being the key risks.

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China Eastern (670:HK), Air France, Delta, Virgin equity partnership negative for Air China (753:HK)

Global – China Eastern has entered into a Marketing Agreement with Air France-KLM that will boost its network reach and traffic feed on China-Europe routes following CEA’s parentco’s planned 10% investment in AFK which is acquiring a 31% stake in Virgin Atlantic Airways. This new development is negative for Air China which currently has a huge market share lead in this route region.

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Chinese airlines: 3Q17 capacity growth risks hurting yields after favourable 1H17

China – The major Chinese airlines just reported their 1H17 operating statistics, reflecting robust traffic growth of 11%. This is in line with our expectations and supports fairly favourable financial results in late August. A new concern we have is that domestic capacity growth is accelerating in 3Q17 which could hurt passenger yields if not matched by demand …..

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AirAsia Bhd (AIRA:MK)’s stake in planned China JV likely to be capped at 25%

China – AirAsia Bhd (AIRA:MK) signed a memorandum of understanding with China Everbright Group and the Henan Government Working Group to establish AirAsia (China), a low-cost carrier to be based in the Henan provincial capital of Zhengzhou.The shareholding of the joint venture, AirAsia (China) has yet to be finalised but we believe that that it will be …..

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China Outbound Tourism Analysis – Winners and Losers

Global – The China outbound tourism boom is showing no signs of abating with growth of 8% y/y in 1Q17, an improvement from the 4% growth achieved in full year 2016. We take a closer look at some of the countries and equities that are benefitting the most as well as the others that have missed out on this growth.

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AirAsia Berhad (AIRA:MK) – Key Takeaways from 1Q17 Results

Malaysia – AirAsia just reported a net profit of M$584m in 1Q17, down 22% y/y on a pro-forma basis. Here are our key takeaways: 1Q17 strong headline results were driven by several sizeable one-off items. These included M$214m re-measurement gains from the consolidation of AirAsia Indonesia and AirAsia Philippines (which were previously equity accounted for), M$127m negative goodwill on consolidation

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Update (21 April 2017): US, UK electronics ban on Middle-East flights could benefit airlines in Asia

Global – In an earlier Crucial Perspective report (24 March 2017), we highlighted the impending impact of US, UK electronics ban on Middle-East flights and how that could benefit airlines in Asia. This impact is now underway; On 19 April 2017, Emirates commented that it has seen a “significant deterioration in the booking profiles on all the airline’s United States routes across all travel segments” and announced reductions in its flight schedules

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1Q 2017 Earnings Preview: Chinese Airlines

China – The Chinese airlines will report their 1Q 2017 financial results under PRC accounting standards at the end of April. Here is our take on what to expect: The major Chinese airlines’ passenger traffic growth remained robust in 1Q 2017, rising 16% y/y, ahead of their 13% capacity expansion. This lifted passenger load factor by 2ppts y/y to 83%.

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US airlines analysis: Overbooking flights may not yield higher airline profits

United States – After United Airlines’ much criticised attempt to “re-accommodate” a passenger on an overbooked Chicago-Louisville flight last Sunday night, we received a number of emails questioning the assumption that overbooking flights increases profits for the US airlines. After all, an airline that frequently overbooks flights could simply be inefficient at aircraft capacity deployment

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China Southern Airlines Initiation Research Report 2017 – Strong domestic drivers tempered by funding needs

China – China Southern Airlines’ stock price has outperformed China Eastern Airlines’ but underperformed Air China’s in the past 12 months – its H share price has risen only 5% and underperformed the Hong Kong Stock Exchange Hang Seng China Enterprises Index (HSCEI) by 11%. CSA’s underperformance versus the market is mainly driven by investors’ concerns about the negative impact of passenger yield pressure

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Air China (753:HK) Initiation Research Report 2017: Top choice among the Chinese airlines

China – Air China’s H share price has risen 14% but underperformed the Hong Kong Stock Exchange Hang Seng China Enterprises Index (HSCEI) by 3% in the past 12 months. Its underperformance versus the market is mainly driven by investors’ concerns about the negative impact of passenger yield pressure (-5% y/y in 2016), foreign exchange losses from the weaker Renminbi (-6% y/y) rising jet fuel prices (+29% y/y)

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US, UK electronics ban on Middle-East flights could benefit airlines in Asia

Global – We assess the impact of the United States and United Kingdom’s ban on “large electronics devices” from carry-on luggage for international direct flights originating from specific Middle East and Africa airports. We estimate that there are 7 million connecting passengers travelling to/from the Asia Pacific on routes that hub in the airports affected by the electronics ban and some of this traffic is likely to divert to the Asia Pacific airlines.

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Cathay Pacific Airways (293:HK) Initiation Research Report 2017 – Cathay Pacific outlook to stay gloomy?

Hong Kong – We see further downside risk to Cathay Pacific’s share price to our fair value of HK$10 (0.7x P/B) as we expect Cathay Pacific outlook to stay gloomy near term and incur further losses in 2017 given its higher fuel costs and continued pressure on passenger yields.However, we do not expect the stock to de-rate below its historical trough of 0.7x P/B as we believe that the market has already priced in Cathay Pacific’s expensive fuel hedges and

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Singapore Airlines Initiation Research Report 2017: Will SIA be a “sexy” stock again?

Singapore – We believe the worst is over for Singapore Airlines but the stock could remain range-bound near term given our expectations of lacklustre earnings in 4QFY17 and continued pressure on passenger yields in FY18. However, the longer-term drivers lean on the positive side and given SIA’s strong balance sheet and attractively high break-up value, we expect Singapore Airlines’ share price to re-rate in the longer term …

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Impact of China travel curbs to South Korea – Winners & Losers

South Korea – We assess the impact of China travel curbs to South Korea. Background: Korea Joongang Daily reported on 4th March 2017 that the Chinese government has instructed the travel agencies to stop selling tour packages to South Korea starting from 15th March 2017 in the latest retaliation against the deployment of the United States’ Terminal High Altitude Area Defense (THAAD) system in South Korea. Chinese travelers can still visit Korea if they do direct ticket bookings and free-and-easy trips.

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Airlines Demand Supply Analysis in the Asia Pacific

Asia Pacific – Our Airlines Demand Supply Analysis expect air travel demand and supply growth to be better matched going forward, from supply growth (+10% y/y in 2016) surpassing demand growth (+9% y/y in 2016) to nearly balanced demand-supply growth of 9% in 2017. As per capita income continues to rise in the region, the Asia Pacific airline sector’s air travel demand is expected to grow 8% per annum in 2018 and 2019 …

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Brief overview of the airline sector capacity deployment in 1H17

Asia Pacific – The Asia Pacific airline sector carries the world’s largest share of passenger traffic, accounting for 33% of the global revenue passenger kilometres (RPKs). The sector has been growing passenger capacity in terms of available seat kilometres (ASKs) by 8% y/y in 2016 with passenger load factors improving 0.8ppts y/y to 79.7% as passenger traffic grew 9% based on IATA’s statistics.

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Macroeconomic drivers of airlines share prices in the Asia Pacific

Asia Pacific – The Asia Pacific airline stocks can be fairly macro-driven. One may not necessarily know much about the airline industry or individual company drivers and still earn a handsome return from trading some of the more liquid airline stocks. Here are some macro trade ideas that have worked in the past and remain relevant going forward:

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Global airline industry supply outlook in the next 5 years

Global – Industry oversupply has driven intense fare competition in the past 6 years, depressing most Asian airlines’ profitability even after oil prices halved. When will we see better days? We take stock of the global aircraft orders to assess the industry’s supply outlook in the next 5 years. We expect the global airline industry supply outlook (especially Asian airline industry’s overall supply growth) to moderate in the coming years.

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1H17: Capacity expansion and cutbacks among airlines in Asia

Asia – We analyze the Asia airlines’ near term flight schedules to determine which major route regions and airlines may face greater or lower load factor and yield pressure due to their near term capacity plans. Here are our key findings – In Asia, which is the largest route region for the Asia Pacific aviation sector, IndiGo, Lion Air and Shandong Airlines have the most aggressive capacity growth plans in 1H17 while …

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