Key Takeaways:
BofA Securities cut its price targets on three major Chinese airlines, citing a 73 percent surge in domestic jet fuel costs that is pressuring industry-wide margins.
In a research report from April, the bank said that while fuel surcharges can pass through some of the rising costs, "there is a risk to base fares excluding fuel surcharges" due to price-sensitive leisure travelers.
The bank lowered its target for Air China (00753.HK) to HKD6.7 from HKD8.3, cut China Southern Airlines' (01055.HK) target to HKD4.9 from HKD5.92, and trimmed China Eastern Airlines' (00670.HK) target to HKD2.7 from HKD2.9.
The move highlights intense cost pressures facing the global aviation industry. In the U.S., Delta Air Lines recently scrapped its planned capacity growth for the June quarter as fuel prices have nearly doubled since late February, adding over $2 billion to its expected quarterly fuel bill.
BofA Securities reiterated its Buy rating on Air China, a Neutral rating on China Southern, and an Underperform rating on China Eastern. The bank noted that competition from China's extensive high-speed rail network adds another layer of pressure on domestic air carriers' ability to raise base fares.
The challenges in China mirror a global trend. Delta CEO Ed Bastian warned the fuel price spike would accelerate structural change across the airline industry. "It’s going to separate the winners and force the weaker players to take some pretty significant steps," Bastian said on Wednesday.
Despite the headwinds, BofA believes the downside for Chinese airline base fares is limited because of constrained capacity growth and rising flight cancellation rates. The price target cuts suggest that while airlines are seeing strong demand, they may not be able to fully offset the sharp increase in their largest variable cost.
This article is for informational purposes only and does not constitute investment advice.
