China Southern Airlines

Aviation stocks fly despite emptier planes during Labour Day holidays

Industry glut due to Chinese airlines’ aggressive expansion is being alleviated, analysts say

PUBLISHED : Wednesday, 04 May, 2016, 6:09pm
UPDATED : Wednesday, 04 May, 2016, 6:09pm

Aviation stocks rose the most among A shares on Wednesday, even though Chinese travel fervour during the Labour Day holidays was not strong enough to keep planes as full as they were last year.

China Southern Airlines rose by the daily limit of 10 per cent while five other airlines listed in Shanghai rose at least 6.29 per cent. Airline and airport stocks as a whole rose 6.9 per cent, compared with a 0.05 per cent dip in the Shanghai Composite Index.

But Chinese airlines did not do particularly well during the “mini golden week”. Haitong Securities said passenger load factor – a measure of plane utilisation – slid 2 percentage points on average at mainland airlines during this year’s Labour Day holidays, compared with last year’s.

Business was weak in recent months because capacity grew too fast during the low season
Yu Nan, Haitong

Chinese airlines have been aggressively expanding, especially on international long-haul routes, in order to tap the travel potential of the world’s most populous nation. That has outpaced demand growth and resulted in weak sales in recent months.

Despite a 7 per cent rise in mainland visitor number to Hong Kong during the period to 470,000 – the highest in four years – load factor at Hong Kong Airlines remained flat compared with the same period last year, the airline’s commercial director, Li Dianchun, said.

“Most of that increase had come from border-crossers on land. We didn’t feel much of a boost,” he said.

Yu Nan, a Shanghai-based analyst with Haitong, said aviation stocks, which had “significantly underperformed”, had been buoyed by valuation correction and improving fundamentals.

“There are signs that the industry’s supply-and-demand imbalance is getting better,” he said. “Business was weak in recent months because capacity grew too fast during the low season. Now we enter May, demand is picking up.”

Yu said that although the airlines’ planes were emptier than at the same time last year, the absolute load factor numbers showed supply-and-demand had improved.

Haitong said mainland airlines’ booking rates for the coming seven days are 5 percentage points higher than last year, 2 percentage points higher for the coming two weeks and 1 percentage point higher for the coming three weeks, showing a rebound.

Yu said airline stock might rise further, mainly because they had been underperforming. “Plus the Disney factor [in Shanghai], there is room for valuation correction,” he said. His top pick for the medium-term is Shanghai-based Juneyao Airlines.