Light on the horizon for Asia-Pac airlines: DBS

Air China is DBS' s top pick among Chinese airlines, while DBS downgraded Cathay Pacific to "hold' due to the ongoing Hong Kong protests.
JANUARY 13, 2020 - 2:26 PM

Earnings for Asia-Pacific airlines should see some recovery in 2020, thanks to a bottoming of the global economy and better supply-demand dynamics in the aviation industry, said DBS analysts in a study.

These airlines include China Southern Airlines, China Eastern Airlines, Air China, Cathay Pacific, Singapore Airlines Group, Thai Airways, Asia Aviation (AAV), Bangkok Airways, AirAsia, AirAsia X, Garuda Indonesia, Cebu Air. 

The International Air Transport Association (IATA) projects an aggregate profit of US$6.0 billion by Asia-Pacific airlines for FY20, up from US$4.9 billion in FY19, while average profit per passenger for FY20 is expected to be at US$3.3.

The earnings recovery in 2020 is on the back of firm demand for air travel, a recovery in world trade and air cargo, and a relatively stable fuel cost, said IATA.

The global economy is expected to have a slow but solid growth in 2020, as The World Bank forecasts global economic growth to increase slightly to 2.7 per cent in 2020, from 2.6 per cent in 2019.

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The World Bank further projects growth in East Asia and Pacific to remain flat at 5.9 per cent in 2020. 

Air travel demand “should remain firm in Asia,” said DBS, as IATA projects Asia-Pacific passenger demand, as measured by Revenue Passenger Kilometres (RPKs), to increase by 4.8 per cent year-on-year in 2020 - up slightly from last year’s regional RPK growth. 

DBS predicts RPK growth for regional carriers to slow down into FY20, though remaining “fairly firm,” driven by ongoing economic growth and activity. 

Further, DBS said: “Supply should better match demand in 2020 and provide a lift for load factors and earnings.” 

DBS projects an aggregate capacity growth - measured by Available Seat Kilometres (ASKs) - of 5.9 per cent in FY20 for the airlines under its coverage, with the Chinese airlines adding the most capacity in the region.

Regional airlines are projected to have stable or even improved passenger load factors, thanks to a better match between supply and demand. 

DBS further expects passenger yields to stay firm or to rise marginally in 2020. 

Supply better matching demand can also ease the pricing competition which has been intense in 2019 and resulted in lower yields.

On the jet fuel front, DBS believes that the crude oil market will remain “fairly well supplied” with global supply growing around 0.1-1.0 million barrels per day, despite the Organization of the Petroleum Exporting Countries (OPEC) lowering its oil production and the recent spate in tensions in the Middle East, 

“As such, fuel costs for airlines should be manageable ahead,” said DBS. 

DBS maintains its Brent crude oil forecast at US$60-65 per barrel, and its jet fuel forecast is still capped at US$80 per barrel for FY20/21.

Out of all the airlines it covered, DBS projects that Chinese carriers will clock the strongest recovery in earnings, given continued firm domestic demand for air travel. 

Further, “forex losses should be off the cards for the Chinese carriers,” as the Renminbi is likely to hold stable against the US dollar, added DBS.

“Air China is our top pick among Chinese airlines,” said DBS. “We like Air China as a proxy to ride on the continued growth in China’s civil aviation market, and as the airline with the best earnings quality among its peers.”

DBS also believes that both China Southern Airlines and China Eastern Airlines will see “a sustained recovered ahead,” 

DBS recommends “buy” for all three Chinese carriers.  

Meanwhile, Cebu Air has up-gauged its aircrafts to increase seat capacity to support the firm domestic demand in the Philippines, and DBS recommends “buy” for Cebu Air’s shares as well. 

DBS recommends “buy” for Singapore Airlines, thanks to its carriage growth of 8.2 per cent and revenue per ASK growth of 1.2 per cent, despite weaker performances at SIA’s cargo operations, Scoot, and Silkair. 

“(This) shows that SIA’s transformation programme is bearing fruit and should help a sustained earnings recovery,” said DBS. 

Meanwhile, DBS has recently downgraded Cathay Pacific to a “hold” call, as the Hong Kong flag carrier faces a “clouded” outlook, with the protests in Hong Kong showing no sign of abating. 

Elsewhere, DBS noted that earnings growth for Thai carriers will depend on higher demand from tourist arrivals and capacity expansion management, while AirAsia and AirAsia X seem to focus more on profitability, instead of cutting prices to compete for a higher market share against Malaysia Airlines. 

That said, the seemingly optimistic outlook for regional airlines is still haunted by a few key risks. 

A worse-than-expected economic slowdown in China and Asean will affect demand and earnings, an unexpected uptick in oil prices can dent airlines’ profitability, and local demand shocks caused by domestic events can reduce demand for air travel in the affected regions.

Airline profitability is highly sensitive to the movement in jet fuel prices, given the low profit margins in the aviation industry and fuel cost taking the lion’s share of operating expenses.

The Business Times reported in Dec 2019 that airlines plying the Singapore-Hong Kong route have cut prices and flights due to the declining demand in light of the Hong Kong civil unrest.