Asia/Pacific Airlines
Four Positive Catalysts in
Alignment; Upgrading SIA
and CPA to OW
Investment conclusion: Since the beginning of the
year, the MSCI Asia/Pacific Airline index has tracked the
MSCI Asia/Pacific index, while Tier-1 airlines –
Singapore Airlines (SIA), Cathay Pacific (CPA) and
Qantas – have underperformed their respective market
indices. We think the relative underperformance gaps
will close from here. We upgrade SIA to OW from UW
and CPA to OW from EW, as we believe both airlines will
benefit from the global economic recovery next year and
the return of premium travelers.
Why buy now? Four near-term catalysts are in
confluence: (a) both RPK and FRTK are at inflection
points; (b) premium yield and cargo rates are stabilizing;
(c) there is less oil complexity as fuel hedging positions
are unwound and/or restructured; and (d) equity
recapitalization lowers the balance sheet concerns for
airlines. These four factors are pointing to a bullish up
cycle for Asia/Pacific airlines’ absolute valuation.
What's new: In this report, we update our proprietary
study on mark-to-market fuel hedging for the
Asia/Pacific airlines and where the airline business is
relative to the business cycle. In the individual company
section, we list the key signposts that have made us turn
positive on the stocks as well as our major concerns.
Where we differ: Our views are: (a) Sharp decline in
premium travel and yield is cyclical, not structural, and
premium yield will recover as in past cycles; (b) Higher
oil prices used in our model compared with consensus
and crude oil future; and (c) Valuation metric shifting to
EV/EBITDA from P/BV as we look to mid-cycle earnings.
Buy Singapore Airlines, Qantas, EVA Airways and
Cathay Pacific.
Trim positions in China Southern, Asiana and Air
Asia.