A new report from HSBC on Chinese airlines shows the share prices of the big three carriers – Air China, China Eastern and China Southern – rebounding after a 4-10% dip following the news of the Omicron variant. As those fears recede, HSBC remains confident that despite resurging cases in China, that travel sentiment will be strong once COVID-19 cases subside, and has reiterated its buy recommendation on the big 3 airlines.
“We believe the pent-up demand in the China domestic market remains solid despite ongoing waves of COVID-19 cases,” said Parash Jain, Head of Shipping & Ports & Asia Transport Research at HSBC. “We have observed that when COVID-19 cases subside, demand and air capacity pick up rapidly. While we see no near-term turnaround in China's strict Zero-Case policy, we learnt that local government has become more agile in tracking, isolating and handling sporadic local cases, insulating the broader economy from the impact of a small-scale regional lockdown. We, however, caution that mutated variants may pose new challenges to the Zero-Case policy, as seen from the shorter time gap between each wave.”
However, he adds that recurrences of COVID-19 may cause travellers to prefer short-haul local trips over long-haul flights, which may potentially bring downside risks to the Big-3 airlines.
“We remain convinced that the Big-3 airlines remain well positioned and capitalised in the post-pandemic world. Not only do they have a resilient local market to generate positive cash flows, but also should benefit from weaker global peers following a series of airline restructuring, bankruptcy, downsizing and aircraft delivery delays. Therefore, we see the domestic market continuing to provide cushion to earnings and valuations of the Big-3, while any accelerated reopening of global travel may lead to substantial upsides. We continue to expect that international travel may recover to 50% of its pre-pandemic scale in 2023.”