Airline shares surge in Hong Kong and Shanghai after China loosens fare controls and yuan strengthens

Shares in Chinese airlines surged to multiyear highs in Hong Kong and Shanghai on Monday, after Chinese regulators loosened price controls on domestic flights, furthering market-oriented reforms in the sector.

Domestic airfares are controlled by the state – the Civil Aviation Administration of China and the National Development and Reform Commission issue government price guidances and let airline operators adjust within a range.

The sector also received a boost after the People’s Bank of China strengthened the yuan’s exchange rate with the US dollar to 6.4832, its highest level in 20 months, sparking a rise in the yuan rate on the onshore market. A stronger yuan is expected to benefit airlines, which are typically burdened with heavy US dollar debt.

Air China’s H shares jumped by as much as 10 per cent to HK$10.9, their best level in seven years. They closed at HK$10.5, up 6.2 per cent from the previous session. About 62 million shares worth HK$659 million changed hands.

Its A shares in Shanghai also touched a high of 13.12 yuan, their highest level in two-and-half years, before paring gains to 2.6 per cent to end at 12.5 yuan. .

Cathay Pacific Airway, a major shareholder of Air China, was up 2 per cent in intra-day trading, before reversing gains and closing 0.2 per cent lower at HK$12.56.

China Southern Airlines’ H shares briefly surged by 11 per cent to HK$9.34, their highest level in more than two years. They finished up 4.3 per cent at HK$8.8.

The company’s A shares jumped by 8.6 per cent to 12.13 yuan in the morning. They were quoted at 11.6 yuan at close, up 3.9 per cent. .

China Eastern Airlines’ H shares spiked more than 10 per cent intra-day. Nonetheless, the gains disappeared in the final hour of trading. They settled 2.2 per cent lower at HK$6.1. Still, its A shares closed up 2.1 per cent at 8.42 yuan.

The broad rally in the sector came after the regulators jointly issued a guidance on Friday allowing the market to set prices for domestic flights on routes that are operated by at least five airliners. Each operator, for each flight season, can raise airfares by no more than 10 per cent on routes that should not exceed 15 per cent of the company’s total number of routes.

The move marks a further step towards a market-oriented reform of the sector, after the regulators in 2016 scrapped price controls for fares on domestic routes shorter than 800 kilometres.

Citi reiterated its positive outlook for Chinese airlines in a report on Monday, and said it expected the sector to receive a significant boost in earnings thanks to the new policy.

“It is a significant breakthrough,” the bank said, adding that the reform has increased the number of routes that allow market-based pricing by 306, and will pave the way for airliners to raise fares.

Analysts forecast that earnings at China’s three biggest airlines – Air China, China Southern Airlines and China Eastern Airlines – will increase by 10 per cent to 15 per cent from the second to fourth quarter in the new financial year.

Smaller, budget airliners such as Spring Airlines and Juneyao Airlines will also benefit, they said.