Chinese Airlines Earnings: Cautious Traveler Spending and Competition Weigh on Passenger Yield

After factoring in lower passenger yield and higher jet fuel cost assumptions, we cut our fair value estimates by 31%-40% for the three Chinese airlines, namely, Air China, China Southern Airlines, and China Eastern Airlines. Although the airlines’ net losses in the first half align with their preliminary guidance, passenger yield declined more than we anticipated. The Chinese airline industry is fiercely competitive, and passenger yields have been on a downtrend for more than a decade. We do not see a structural tailwind to reverse the trend. Therefore, we reduce our passenger yield assumptions through 2028. For 2024, we project Air China to just break even, China Southern to turn around with a CNY 2.8 billion net profit, and China Eastern to make a CNY 3.5 billion net loss. We now value Air China at HKD 3.85 (CNY 3.54), China Southern at HKD 2.92 (CNY 2.69), and China Eastern at HKD 1.79 (CNY 1.65). We think the H-shares are fairly valued, and the A-shares are expensive.