Aviation gains as countries raise vaccination rates, treat Covid-19 as endemic: OCBC
THE global aviation sector stands to benefit as more countries shift towards treating Covid-19 as endemic and raise their vaccination rates, said an OCBC Investment Research analyst in a research note released on Wednesday.
This comes as the performance of airline stocks globally has been weighed down by the spread of the Covid-19 Delta variant. The Bloomberg World Airlines Index fell by 9.7 per cent and 5.2 per cent in June and July this year respectively.
The analysts pointed out that Asia-Pacific countries such as Malaysia, Thailand, Japan and Australia have announced plans to treat Covid-19 as endemic following Singapore's reopening moves.
Another encouraging signal comes from the Biden administration's announcement on Monday that the United States would lift restrictions on fully vaccinated travellers starting in November.
"While we believe a large-scale and significant improvement in cross border and international travel is unlikely to happen in 2021 and the first half of 2022, this is a positive step forward which will help the recovery of the aviation and tourism sectors, barring the risks of a potential spike in Delta variant cases," the analysts said.
Therefore, the analysts are selectively positive on certain companies in the aviation sector.
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Looking at Singapore's aviation sector, they said that visitor arrivals may remain muted this year as vaccination rates and border measures vary across different countries. A more meaningful recovery is likely to happen only in the second half of next year and in 2023.
With this in mind, the analysts like SATS S58 as it looks to benefit from strong cargo demand and a gradual recovery of air travel, buffered by its non-travel business. Specifically, cargo revenue grew on the back of demand from e-commerce and temperature sensitive supplies such as vaccines and perishable goods. The company is also looking to grow its non-travel business across Asia by acquiring other cargo handling assets and central kitchens.
Aside from its non-travel business, the analysts further noted that Sats is innovating to help airlines like Scoot switch to digital menus, while also introducing airlines to low-touch, individually packaged meals to offer a safer contactless in-flight experience to passengers.
The analysts were also positive on SIA Engineering S59 , which saw line maintenance and the number of flights checked at its Singapore base increase by 13 per cent and 31 per cent respectively quarter-on-quarter in its latest financial quarter ended June 30. Furthermore, as it is currently trading at 1.45 times its book value, which is one standard deviation below its historical average of 2 times its book value, the analysts find its valuation "undemanding".
Sats shares closed at S$4.05, up S$0.02 or 0.5 per cent while SIA Engineering shares rose 1.5 per cent or S$0.03 to close at S$2.10 on Wednesday.
Turning to the US aviation sector, they are more bullish on Delta Air Lines on its stronger recovery in international and corporate travel. Europe made up 52 per cent of its international available seat miles in 2019, compared to 43 per cent for its peers. It would also further benefit from the US' announcement to reopen its borders to 33 countries from November, including UK and Europe.
The analysts also liked Southwest Airlines, which is more focused on the US domestic market. While US airlines did see customer bookings slowdown due to the current spike in Covid-19 cases there, the spike has been less impactful and is expected to be temporary. The airlines also noted that booking activity has largely stabilised over the past week.
However, they also noted that Southwest is estimating a deeper decline of 18 to 20 per cent in its operating revenue in the third quarter of the year due to a rise in Covid-19 cases in August. The airline had hoped to be profitable in its earlier guidance in July.
As for the aviation sector in China, the analysts believe that the Chinese government will be able to get the latest Covid-19 outbreak in Fujian controlled in time for the October Golden Week. Domestic demand should also remain strong as 76 per cent of the population has received at least one dose of the vaccine. In particular, the analysts like Air China and expect its domestic seat capacity to reach 2019 levels this year and increase further to 120 per cent of those levels in 2022.
Yet, as the country prepares for the Beijing Winter Olympics in February next year, the analysts do not expect restrictions on international travel to be loosened before then. Thus, they forecast that Air China's international seat capacity will remain low at 5 per cent and 35 per cent of 2019 levels for this year and in 2022 respectively.
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