China airlines battling coronavirus turbulence – but analysts see stock-buying opportunity for investors

Yujing Liu

China and the rest of the world’s airlines are going through turbulence they haven’t seen since the global financial crisis in 2008 and the September 11 terror attacks in 2001. It makes for a nail-biting time as well for investors.

While the coronavirus has had much of the globe fixated on harrowing stories of stranded passengers on virus-stricken cruise ships, China’s airports have been filled with weirdly surreal images: A family arriving at the Beijing Capital International Airport wearing hazmat suits. A passenger donning ski goggles as makeshift protection against infection. And far more people appearing on advertisements than at check-in queues at Shanghai’s airport – normally the ninth busiest in the world.

Airlines have swung from frantically cancelling flights to now begging passengers to come back with what the Chinese call “cabbage prices” – or bai cai jiaas cheap as US$4.

The global aviation industry could suffer a US$63 billion loss – or 11 per cent – loss in revenue from the passenger business, in an optimistic scenario of the virus development. China would shoulder over a third of the damage, the International Air Transport Association forecast last Thursday. In a pessimistic scenario, the loss could reach US$113 billion globally, almost fourfold the trade group’s previous estimate in late February.

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Stocks of China’s three major airlines have tumbled about 30 per cent since a recent peak in mid-January. Listed regional players including Cathay Pacific Airways and Singapore Airlines have also suffered a sharp drop in share prices.

But most analysts say investors should take a look China’s three largest state-owned airlines: Air China, China Eastern Airlines Corp, and China Southern Airlines. These stocks are rated overwhelmingly as a “buy” by analysts tracked by Bloomberg.

“The worst should be over,” said Kelvin Lau, head of auto, transportation and industrial for Hong Kong at Daiwa Capital Markets.

“We are positive on buying China airlines at this time … if you expect they will recover in May and wait to buy in May, then it is too late,” he said, adding that share prices could rebound ahead of a recovery in air traffic.

There are reasons for optimism, analysts say.

New cases of infections are slowing in China. That’s true even in Hubei province – the epicentre of the outbreak. The state has waived a hefty fee for airlines, and is expected to roll out more supportive policies. And, in a long-term perspective, Chinese people still travel by air far less than their counterparts in developed countries like the United States – leaving plenty of space for airlines to expand.

To be sure, the coronavirus outbreak’s damage on China’s 1.06 trillion yuan (US$144 billion) civil aviation – the world’s second-largest after the US – has been nothing short of devastating. The US$22 billion estimated revenue loss from passenger travelling would be the industry’s gravest in its 33 years of history.

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The last time the industry suffered a blow of this magnitude was in 2008, a year of surging fuel prices and plunging demand after three national crises in a row – a series of severe snowstorms that killed at least 129, a massive earthquake that led to over 69,000 deaths, and a financial crisis that swept across the world.

Even then, the profit loss across the industry was merely 28 billion yuan (US$4 billion), while revenue stayed flat, according to figures from regulator the Civil Aviation Administration of China (CAAC).

And in 2003, when Sars – severe acute respiratory syndrome – broke out, the sector recorded an annual loss of just 3 billion yuan, helped by a quick recovery in travelling demand in the second half of the year.

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The coronavirus outbreak is “the industry’s worst crisis ever,” said Toliver Ma, equity research analyst at Guotai Junan Securities.

Concerned about the industry’s spiking uncertainty in the short term, he recommended that investors stay put and keep an eye on virus developments, as well as other factors such as the yuan exchange rate and fuel prices.

But most other analysts covering the airline industry have expressed a more upbeat outlook.

China extended the seven-day Lunar New Year break by a week in early February to contain the spreading virus. Now authorities have shifted their focus back to the economy and pushed for factories and companies to return to normal operations. Workers have gradually returned to big cities from their hometowns.

The average load factor – which measures the percentage of available seating capacity filled with passengers – of airlines in China rebounded to 60 per cent as of the end of February, up from below 50 per cent recorded in mid-February, according to a report by Minsheng Securities published last week.

Chinese health experts led by the government’s senior medical adviser Zhong Nanshan have expressed confidence that the epidemic in China will be under control by the end of April.

However, the virus continues to spread overseas in recent weeks, which will continue to impact international flights of China’s airlines.

“We believe the summer domestic travelling demand will recover first, and some demand for overseas travelling will be shifted back to domestic,” Minsheng Securities analysts led by Gu Ximin said in the report.

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Luya You, an analyst at Bocom International, estimated China’s domestic airline market will rebound in the second quarter – most likely in April or May.

Beijing is widely expected to roll out cash incentives and other measures to consolidate the industry and enhance its efficiency.

In February, the CAAC waived airlines’ compulsory payment to a government industry development fund this year. The fees, which were reduced by half last year, accounted for as much as 65 per cent, or 2.9 billion yuan, of China Southern Airlines’ pre-tax profit in 2018, according to a report by China Merchants Securities published last week.

The regulator could also push for mergers and acquisitions among airlines, which would be the first major consolidation in the market since 2010. The Chinese market is highly fragmented with 60 airlines competing for a share. That has weighed on the profitability of the overall industry, Guotai Junan Securities said in a new report.

Meanwhile, the China market still remains a highly lucrative one – with huge growth potential.

The air flight per capita in China was just 0.44 times in 2018, far below the 2.73 times in the US, according to China Merchants Securities. This means lots of room for further market penetration, the analysts said.

Aircraft maker Boeing in September raised its forecast for China’s aircraft demand for the next two decades, driven by higher expectations of more air travel. Chinese airlines will need 8,090 new planes through 2038 to handle a 6 per cent projected annual growth in air traffic, it said.

“The huge losses in the first quarter has already occurred, but a temporary adjustment and potential consolidation in the industry could make it more concentrated and improve the competition landscape,” analysts at TF Securities said in a report last week. “After the short pain, the industry will have much wider space to grow in the long term.”

Additional reporting by Kathleen Magramo

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