As the world gradually emerges from the shadows of the COVID-19 pandemic, the airline industry remains one of the most critically affected sectors. Among major players in this landscape, Chinese airlines are navigating their unique challenges, significantly trailing their Western counterparts in recovery speed. Analysts have zeroed in on Air China, traded in Hong Kong, as a pivotal candidate for a turnaround, showcasing its potential to thrive as travel picks up both domestically and internationally.
While China’s economy is the second-largest globally, its recovery from the pandemic has been plagued by restrictions and regulatory hurdles that have stunted the growth of its airlines. In stark contrast, the U.S. airline industry has experienced a rapid resurgence, underscoring a geographical disparity that has ramifications for investment opportunities. Among various airline stocks bouncing back, Air China stands out, being the only Chinese carrier to have a presence on every continent, including a strong hold on lucrative routes to Europe and North America.
Despite experiencing a rally in Hong Kong’s Hang Seng Index early in 2024, Air China’s stock price remained flat with single-digit increases, languishing over 60% below its peak in 2018. This stark reality provides a unique investment perspective; the current valuation of Air China is attractively low, closer to its five-year pre-pandemic average. Analysts at DBS, including Jason Sum and Paul Yong, confirmed this outlook, maintaining a buy rating and setting a price target of HKD 5.60. The proposition hinges on the likelihood of a significant cash flow generation, essential for addressing its financial liabilities and restoring balance sheets worn thin by ongoing pressures.
The upcoming Lunar New Year poses an exciting opportunity for Air China, with booking trends reflected in increased interest in international travel. According to data from Trip.com, outbound travel from mainland China to Europe surged by 50%, while inbound travel has tripled in anticipation of the holiday. This trend can provide a solid bounce back in ticket sales, underscoring Air China’s potential to capitalize on the holiday rush.
The Chinese government has recently implemented expanded visa-free policies for citizens from several countries, notably Japan and various European regions. Such initiatives are likely to stimulate inbound and outbound travel, presenting further avenues for Air China’s growth. Analysts anticipate that government-driven economic policies in 2024 will bolster consumer spending, positioning the airline to reap the benefits of revitalized travel across borders.
With Air China owning a significant stake in Cathay Pacific, its connections to the international travel market are diversified. JPMorgan analysts recently upgraded their rating on Air China, emphasizing its greater dependency on international routes compared to other airlines, which could lead to notable earnings improvements over the next two years. Additionally, expectations about commodity prices play a crucial role. Should oil prices decrease further, airlines like Air China, poised to benefit from lower fuel costs, could navigate the turbulence more adeptly.
While Air China demonstrates solid potential, it undoubtedly faces stiff competition from its U.S. counterparts, such as United Airlines, which has experienced record-setting growth and operates a broader international route network. Nevertheless, analysts believe that the fundamental shifts in travel patterns post-pandemic could play into Air China’s favor as business and leisure travel resumes more robustly in 2024 and beyond.
Goldman Sachs predicts strong domestic growth for air travel, anticipating an 11% surge this year, exceeding pre-pandemic levels, followed by expected expansion in subsequent years. The firm identifies Air China as a primary beneficiary of the resurgence in business travel— a crucial segment typically driving airline profits.
While Air China has been significantly challenged in recent years, strategic investments, favorable governmental policies, and evolving travel dynamics signal a potential turnaround for the airline. For investors, Air China appears to be a compelling choice amid recovery skepticism in the broader market. Its unique positioning as a network carrier capable of servicing global routes lends optimism for future growth, making it a stock to watch in the coming years.