Key Takeaways:
- UBS expects QoQ earnings improvement for China's three major airlines
- Fuel costs, accounting for 30-40% of operating expenses, are falling
- Each carrier lost roughly RMB1.2-1.5 billion monthly during April-May
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UBS forecasts Chinese airline profits to improve as oil slides below $90
UBS said a US-Iran ceasefire driving crude below $90 a barrel will improve profitability for China's three major airlines.
"Fuel costs account for 30 percent to 40 percent of total operating costs for Chinese airlines and represent their single largest cost component," UBS said in a research report.
The bank expects the three major carriers — Air China Ltd., China Southern Airlines Co. and China Eastern Airlines Corp. — to post consecutive quarterly profit improvements, with year-over-year comparisons turning positive. DBS Group upgraded Air China to hold with a price target of HKD4.1.
The retreat in oil prices from war highs above $100 a barrel to below $90 provides relief after the conflict drove crude from about $60 in late February. While losses extended into early June, UBS sees profitability improving in the second half of the month as potential fuel surcharge reductions stimulate demand.
The Middle East conflict that began in late February sent oil prices surging from roughly $60 to above $100 by May, creating average monthly losses of approximately RMB1.2 billion to RMB1.5 billion for each of the three carriers during April and May, according to UBS. Brent crude fell 3.9 percent to about $84 a barrel on Sunday after President Donald Trump said an agreement with Iran had been reached, while US crude dropped 4.8 percent to about $81.
The bank noted that while Chinese airline shares have been under pressure in recent months due to rising oil prices, the market has largely absorbed the negative factors, leaving limited downside. With fuel costs now declining, the sector could see a re-rating as the largest cost headwind recedes.
The call signals that the worst of the oil-driven cost pressure may be behind Chinese airlines after months of heavy losses. Investors will watch weekly jet fuel price data and any further fuel surcharge adjustments for confirmation of the trend.
This article is for informational purposes only and does not constitute investment advice.
[1] ＜Research＞ UBS: US-Iran Ceasefire Expected to Drive Oil Prices Lower, Forecast Earnings of Three Major Chinese Airlines to Improve QoQ[2] Oil prices fall on US-Iran agreement - CNN[3] Oil prices fall on US, Iran deal announcement - Axios[4] Oil slips over 4% after US, Iran reach peace deal, reopen Strait of Hormuz - Global Banking & Finance Review[5] Brent falls below $80 per barrel on report U.S. will allow Iran to sell oil immediately
