Cheap oil lowers costs for China's carriers more than most because they were never allowed to hedge fuel costs when oil was expensive. At the same time, regulators this year let airlines increase base fares on the majority of domestic routes for the first time since 2004. Fares have gone up by 10% on some domestic routes this year, reports Morgan Stanley's Edward Xu.
And with the tourism bug biting the middle class, China's passenger travel continues to grow, rising 14% from a year ago in the March quarter, according to Citigroup's Vivian Tao. For passengers, elimination of fuel surcharges has partially offset fare increases.
Meanwhile, carriers are getting more disciplined. Fleets will expand by 10% to 11%, two percentage points slower than traffic growth, says Ms. Tao. Domestic routes should benefit more, since companies haven't added capacity there as furiously as for international travel.
That is good news for China Southern, which counted on travel in China, Hong Kong and Taiwan for 79% of revenue last year, more than at peers Air China and China Eastern Airlines . China Southern alerted investors earlier this month that it could swing to a net profit of as much as 2 billion yuan ($323 million) in the March quarter, from a 306 million yuan loss the year before.
Southern's Hong Kong shares have doubled so far this year. Some of that is catching up to the revised earnings outlook. But most of the rise in recent weeks occurred when mainland Chinese investors charged broadly into Hong Kong stocks.
If this stampede continues, Southern's Hong Kong listed shares could see their discount to the Shanghai shares narrow further. But this isn't an unadulterated positive, since it is balanced by the potential minus that the mainland money could retreat as quickly as it came in.
Investors should then focus on valuation. Southern's enterprise value, after adjusting for net debt, goes for 6.8 times its forward earnings before interest, tax, depreciation and amortization, cheaper than 7.7 times at Air China and 8 times at Eastern. And it is just slightly more expensive than its own five-year average of 6.6 times, a time period when oil prices hovered over $100.
Investors tended to value Southern lower than peers because its exposure to the staid domestic market was a liability. But with lower supply and higher fares, flying locally should prove more financially glamorous than an international trip.
Source: Wall Street Journal by Abheek Bhattacharya
from China Travel & Tourism News http://ift.tt/1iB6EFm
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