DBS analysts cautious on Asean airlines despite Covid-19 vaccine hopes

WHILE progress in Covid-19 vaccine development is a shot in the arm for aviation, recovery in the sector will be long and uneven, with international air travel recovery lagging significantly behind that of domestic air travel, DBS analysts said their 2021 Regional Airlines Sector Outlook report on Dec 15.

The analysts saw China's big three airlines - Air China, China Southern Airlines, and China Eastern Airlines - as best positioned to outperform in the next 12 months.

They downgraded Cathay Pacific and Singapore Airlines to "fully valued", and were cautious on other Asean carriers "given their tepid earnings outlook and concerns on prolonged restructuring".

Given recent breakthroughs in vaccine development, the second half of 2021 should see a significant rebound in travel activity, said the report.

But before that, in the near term, "the likelihood of comprehensive travel restrictions relaxing has all but vanished", as new Covid-19 waves sweep the region and access to vaccines will vary by country.

The Chinese carriers are poised to do well, given their robust domestic market, relatively low exposure to business travellers, ample liquidity, and vaccine availability, said the report.

In contrast, markets "may have gotten ahead of themselves" on Cathay Pacific and Singapore Airlines. "Meanwhile, the other Asian airlines under our coverage are facing precarious liquidity situations and are planning or have plans to restructure their balance sheets to avoid insolvency," added the analysts.

They maintained a "hold" call on Cebu Pacific and "fully valued" calls on AirAsia X and AirAsia Group, with unchanged target prices of 40 pesos (S$1.11), RM0.03 (S$0.01), and RM0.20 respectively.

They also downgraded their call for Garuda Indonesia to "hold", with a lower target price of 435 rupiah (S$0.04).

Air travel is expected to recover in domestic markets first, followed by regional short-haul trips, and finally broader international travel.

Airlines in the Asia-Pacific region are likely to see a faster recovery than in other regions, given their larger exposure to domestic markets and the higher proportion of intra-region flights out of total international flights.