Key Takeaways:
Morgan Stanley slashed its price targets on China’s three largest airlines by as much as 31 percent, forecasting the sector’s recovery will be postponed to 2027 amid sustained pressure from high energy costs.
"Current airfare hikes are insufficient to cover rising costs, indicating short-term margin pressure," the bank said in a May 14 report, noting that demand is also being affected by higher ticket prices.
The bank cut its target for China Southern Airlines Co. by 30.6 percent to HKD 5.9, China Eastern Airlines Corp. by 27.2 percent to HKD 5.9, and Air China Ltd. by 23 percent to HKD 7.7, though it maintained an Overweight rating on all three.
The revised outlook means the industry's path to profitability is extended, with Morgan Stanley now forecasting losses for all three carriers in 2026. The bank projects a net loss of RMB 7 billion for China Eastern, RMB 5.9 billion for China Southern, and RMB 4.7 billion for Air China.
Morgan Stanley analysts said the key variable for the industry over the next 12 to 18 months remains the price of aviation fuel, which they expect to normalize around $100-$110 per barrel by the end of 2026.
Despite the near-term headwinds, the report maintained a constructive long-term view on China’s aviation industry. Analysts cited four main reasons for this outlook: continued support from inbound tourism, the potential to attract more international transit passengers due to ample fuel supply, persistent capacity constraints that could support pricing in the long run, and the belief that most negative factors are already priced into the stocks.
A potential meeting between Chinese President Xi Jinping and US President Donald Trump could serve as a near-term catalyst, according to the report. An increase in direct China-US flights, which are currently operating at only about 30 percent of pre-pandemic levels, would provide a "mildly positive" impact for the Chinese carriers.
The target price cuts signal that the expected post-pandemic travel boom has not translated into profitability as quickly as anticipated. Investors will now watch for any signs of fuel price relief or a significant increase in international flight capacity to rerate the sector.
This article is for informational purposes only and does not constitute investment advice.
