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Air China’s revenue passenger kilometers （RPK） and available seatkilometers （ASK） rose 2.8% and 2% YoY in October, and passengerload factor （PLF） climbed 0.6ppt YoY to 81.6%. Its 10M19 RPK grew5.9% and ASK grew 5.2%, and PLF rose 0.5ppt YoY to 81.4%.
Comments
October capacity growth continues to slow. October ASK grew 2%YoY vs. 4.9% in September and 7.8% in October 2018. Domestic andinternational ASK grew 2.8% and 1.4% YoY in October vs. 7.5% and1.9% in September, while regional （i.e. Hong Kong, Macao andTaiwan） ASK fell 3.8% vs. +3% in September. We attribute theslowdown to: 1） increased security checks in Beijing for importantevents in October, which may weigh on travel demand; 2） decreasedcapacity expansion for regional lines amid evolving regional events.
Overall PLF continuing to grow YoY thanks to improvinginternational supply and demand balance; decline in regional PLFnarrowing. Air China’s October PLF rose 0.6ppt YoY to 81.6% asinternational PLF increased 2.4ppt YoY to 78.4%, while regional PLFfell 8.3ppt YoY to 69.6% vs. -10.3ppt YoY in September.
YoY decline in oil price to benefit earnings in 4Q19. The CICCcommodities team expects 4Q19 Brent crude oil price to averageUS$60/bbl vs. US$68.6/bbl in 4Q18. We estimate that a US$1/bblchange in oil price would affect Air China’s net profit by Rmb400mn.
We think YoY drop in oil price will mitigate Air China’s cost pressureand boost its earnings.
Valuation and recommendation
Air China-H is trading at 0.9/0.9x 2019e/2020e P/B. Air China-A istrading at 1.2/1.1x 2019/2020e P/B. As 4Q19 capacity growth maydisappoint, we trim our 2019e–2020e earnings forecast 12.5% and14.6% to Rmb7.738bn and Rmb9.733bn. Maintain OUTPERFORM forAir China A/H. Maintain TP of Rmb11.00 for Air China A-share （1.5x2020e P/B with 32.8% upside） and TP of HK$9.20 for H-share （1.1x2020e P/B with 30.5% upside）。
Risks
Disappointing air travel demand; sharp renminbi depreciation againstUSD; sharp rise in oil prices.