Recently, an outbreak of Coronavirus appeared in China. The epidemic has adversely affected transportation during the Spring Festival. We hereby revise our industry outlook for China Airlines in 2020, change our top-pick to Air China (753 HK), and reiterate long-term bullish view.
- The epidemic began to take its toll on the Spring Festival transport. According to the Ministry of Transport of the PRC, during the first 13 days of the Spring Festival transport (10 to 22 Jan), China aviation industry carried a total of 25.05mn passengers, an increase of 8.6% over the same period last year. Since the 14th day (23 Jan), due to the impact of the epidemic, the number of passengers carried on that day began to decline (-0.9% YoY). On the 24th day (2 Feb), the industry carried only 460,000 passengers, a decrease of 76.5% YoY.
- In the previous SARS epidemic, 2Q 03 RPK dropped by 47% YoY. In order to quantify the impact of the epidemic on China aviation industry, we refer to the SARS epidemic in 2003. The SARS epidemic spread in the first quarter, became severe in the second quarter, and ended at the end of the second quarter. In 1Q/2Q/3Q/4Q 2003, quarterly RPK of China aviation industry changed by 17.5%/-47.0%/12.3%/20.9% YoY.
- Scenario analysis: we expect industry-wide 2020E RPK to decrease 7.1% YoY. In the best-case scenario, the epidemic will end in February. In this context, we expect industry-wide RPK in 1Q/2Q/3Q/4Q 2020E to change by -40%/5%/10%/10% YoY, respectively. In the base-case, the epidemic will end in March, and we expect industry-wide quarterly RPK to change by -50% /5%/10%/10% YoY. In the worst-case, the epidemic will end in the second quarter, and we expect industry-wide quarterly RPK to change by -50%/-10% /5%/10% YoY. We expect the best/base/worst case scenarios to occur at a probability of 10%/60%/30%, respectively. On average, we expect industry-wide RPK in 2020E to decrease by 7.1% YoY.
- Sensitivity analysis: Air China’s (753 HK) 2020E EBITDAR is least sensitive. We examined the sensitivity of listed airlines' 2020E EBITDAR to changes in passenger RPK. The hot spots of the Spring Festival air travel are concentrated in cities such as Beijing, Shanghai, Guangzhou, Shenzhen, southwest, northeast, and Hainan. International travel is mainly concentrated in neighboring countries such as Japan, South Korea, Thailand, Vietnam, Malaysia, and the Philippines. Under the circumstances that both domestic and international RPK in 2020E fell by 5% YoY, we expect 2020E EBITDAR of Air China/China Eastern Airlines/China Southern Airlines/Juneyao Airlines to decrease by 16%/29%/32%/48% YoY, respectively.
- Reiterate long-term bullish view: air travel demands are postponed rather than cancelled. The shock of the epidemic does not change the fundamentals of China aviation industry. Air travel demands, particularly those going back to work, are postponed rather than cancelled. We reiterate our long-term bullish view. In addition, due to the epidemic, the oil market is oversupplied, and weak oil prices support the profitability of listed airlines. Top-pick is Air China (753 HK).
