February 23, 2009
Chinese Airlines
Bad News Priced In; Raise
Industry View to In-Line
Investment conclusion: We are upgrading our industry
view to In-Line from Cautious as we believe the worst
period for Chinese airlines is likely behind us. We expect
a recovery in domestic air traffic growth in 2009, which
should differentiate the Chinese airlines from their global
peers that are struggling with traffic declines. We
maintain our OW rating on CSA and EW rating on Air
China, but downgrade CEA to UW from EW due to
valuation reasons.
Traffic recovery: Notwithstanding the weak macro
environment ahead, we expect meaningful recovery in
China’s air traffic growth in 2009 to 7%, from 3.4% in
2008, which was negatively affected by a series of
exogenous events (e.g. snowstorms, Tibetan issues,
Sichuan earthquake and Beijing Olympics).
Downside to domestic jet fuel: We look for further
significant cuts to current domestic jet fuel prices, which
are at a hefty 106% (based on Feb-18 global jet close)
premium to the global level. As our MS global
commodity team is forecasting crude oil price to average
US$35/bbl in 2009, this translates into ~US$50-55/bbl
for global jet fuel price, suggesting at least 35%
downside risk to the domestic jet fuel price.
Government support: In our view, Insolvency for
Chinese airlines is virtually zero due to government
support through capital injections, capacity controls and
other subsidies.
Key risks: 1) Macro deterioration could depress
traveling demand to a more severe extent and yields
(both passenger and cargo) may fall more seriously on
the back of pricing discounts and cancellation of jet fuel
surcharges; 2) The magnitude of domestic jet fuel price
cut may be weaker than expected; and 3) Nonoperational
items such as further hedging losses and
stabilizing or reversing trend in RMB appreciation should
be negative to earnings.