The aviation industry in China and South Korea have proved a rare bright spot in Asia’s beleaguered aviation industry, as long holidays saw a rebound in domestic air travel. Most South Koreans are preparing to return to their ancestral hometowns for the three-day long Chuseok Harvest holiday while China’s Golden Week is expected to see heightened tourism numbers due to China’s early Covid-19 recovery.
“China flight activity is expected to see further rebound in volume (103 index, up from 99 index last week),” says a report from JP Morgan led by its head analyst of infra, industrials & transport, Karen Li. Cirium data suggests that domestic flight schedules for China during the impending holiday are likely to be up 11% y-o-y, though Chinese travel booking platform Ctrip predicts a 20% y-o-y decline in total trips made during Golden Week.
Pricing pressures, says the report, are likely to persist due to excess capacity, with many Chinese airlines redeploy flight capacity to domestic routes. JP Morgan channel checks highlight that domestic air prices can be expected to decline 15-20% y-o-y.
Even with the late Golden Week Rally, recovery to the aviation industry going forward is projected to be milder than expected. Soft 3Q2020 guidance hints at a 50% y-o-y fall in revenue, with sequential improvements in 4Q2020 likely to be limited. Revenue in 4Q is likely to remain approximately 40% lower y-o-y.
In South Korea, Korean Chuseok holiday - which is followed by a weekend - has seen many domestic carriers in South Korea reinstating flight schedules, though certain restrictions could limit recovery. Flight activity rose from 54 index to 64 index in South Korea. Vietnam (51 to 58 index) and the Philippines (15 to 33 index) have also proven bright spots in Asian aviation as both staged a Covid-19 recovery following a resurgence in infections.
But other parts of Asia are still grappling with steady or slower flight activity, including Japan, Taiwan, Hong Kong SAR, Australia, Singapore and Malaysia. Indonesian capital Jakarta is a particular concern as it announced an extension of large-scale social restrictions for another two weeks to 11 October to combate a recent resurgence in infections. Indonesia is the worst-hit country in Southeast Asia in terms of infections.
A Covid-19 resurgence in Europe has seen flight recovery outside of Asia suffer. France (49 to 44 index), the UK (39 to 36 index), Italy (47 to 43 index), Spain (44 to 40 index) and Germany all saw w-o-w declines in flight schedules. The US has also seen recovery momentum hit a wall, recording flattish recovery after a period of rebound during the recent Labour Day holidays.
Nevertheless, these small victories have not been able to avert corporate downsizing on the part of Asian airlines. Despite receiving HK$39 billion ($6.85 billion) in support for recapitalisation, Cathay Pacific is likely planning massive job cuts and disposals as it did not apply for government wage subsidies last month. Singapore Airlines and Qantas are also looking to reduce headcount by 20-30%.
Li and her team are advising clients to pick China Airports over China airlines, as well as stay cautious on Airports of Thailand, Sydney Airport, Cathay Pacific and Singapore Airlines. Shenzhen Airport, in particular, looks like a promising bet due to its large domestic traffic mix and reception of enhanced government policy support.
“Following our coverage initiation on Chinese airlines, we set off with a balanced view on the sector, expecting share price to diverge on back of the underlying pricing power, driving our OW on China Eastern Airlines, UW on China Southern Airlines, Neutral on Air China and Spring Airlines. We also stay cautious on the airtravel plays across the region,” they add.
