China Transports and Airlines

By pjain      Published Nov. 23, 2019, 1:03 a.m. in blog Invest   

Airlines Key Trends and Factors

Key: HKO protests, Taiwan restrictions crimp sales - stocks fall -15% to -20%

Months-long pro-democracy protests in Hong Kong have shown no signs of abating and China stopped issuing individual travel permits for Taiwan in August as tensions grew with the self-ruled island it regards as a wayward province. China's three biggest airlines saw double-digit declines in demand on their so-called regional routes in September, as protests in Hong Kong and Beijing's travel restrictions to Taiwan took their toll. Two of them, China Southern Airlines and China Eastern Airlines have also aggressively cut capacity on those routes to Hong Kong, Macau and Taiwan - routes which account for about 5% of their revenue. Capacity, measured by available seat kilometres, slid 16.7% in September for China Southern and 11.3% for China Eastern, data from the companies showed. But Air China only fell 3%.

Regulation, Airport fees - China's changing policies

Stressed by declining traffic due to HKO protests and Taiwan restriction, China's changing policies allowed the airlines to offset that pain partly by the abolishment of a civil aviation airport development fee, analysts said.

Airlines have HUGE debt-equity at 3x

A weakening yuan currency inflates costs on dollar-debt, reduces profits

Chinese airlines have bought planes with mainly U.S. dollar-denominated loans, the currency volatility is set to hammer their profit margins in the second half.

The forecast cuts come as the Chinese currency yuan has lost more than 3% of its value against the dollar since Aug. 1, when U.S. President Donald Trump announced plans to slap more tariffs on Chinese goods. Chinese authorities allowed the tightly managed currency to breach the key 7-per-dollar level – a level not seen in a decade - feeding fears of a currency war and adding to the bearish sentiment on the yuan.

Oil prices are rising - hurting profits

Oil prices, at around $59 a barrel, are up around 10% so far this year, and forecasts are prices could rise further before year-end.

Avoid internal focussed airlines - High speed trains taking over!

More high speed trains equals less demand for flights in China. These trains are simply more convenient going city-centers and much cheaper.

737Max grounded China's fleet

Analysts quoted China Eastern and China Southern executives as saying they were extending aircraft leases for Airbus planes amid the global grounding of the Boeing 737 MAX following two fatal crashes that killed 346 people. The extensions are until 2020 or even 2021.

The grounding has constrained Chinese airlines' ability to expand capacity, with available seat kilometres, a measure of passenger carrying capacity, missing targets set at the start of the year. However, weaker demand means the capacity cut is not all negative.

Boeing has said it hopes to have approval from the U.S. Federal Aviation Administration by the end of the year for the 737 MAX to return to service. But China is unlikely to approve for 3+ months after that at the earliest.

Trade War hurts Cargo Revenue

Cargo demand is also expected to stay soft, as a protracted trade war between the world's two biggest economies continues to disrupt global supply chains and rattle financial markets.

Major Airlines

x ZNH China Southern c30.8 (30-52) M=10b y=1.2% DE=3x

China Southern, the country's largest carrier by passenger numbers

Net profit attributable to shareholders jumped 17.2% for China Southern to 2.4 billion yuan ($340 million)

It posted a 20.9% year-on-year drop in profit to 1.69 billion yuan ($238 million)

x CEA China Eastern c24.5 (23-42) M=10.3b y=1.6% DE=3x

China Eastern said demand on its regional routes, as measured by revenue passenger kilometres, tumbled by nearly a quarter in September from the same period a year earlier China Eastern posted a 14.9% drop to 1.94 billion yuan. China Eastern also made 2.4 billion yuan, up 9.8%.

Air China

  • Countries flagship carrier

It saw a smaller 9.5% drop in net profit to 3.14 billion yuan due to positive returns from its investment in Hong Kong's Cathay Pacific Airways Ltd, which swung to its first profit for the January-June period since 2016. Air China saw a 4.4% rise to 3.6 billion yuan.


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