The three Chinese airlines we cover—Air China, China Southern Airlines 600029, and China Eastern Airlines—all turned profitable in the third quarter on the back of strong summer travel demand. However, the profitability level is lower than expected. We believe the rising jet fuel price and falling international passenger yield weighed on earnings. After adjusting our fuel cost and passenger yield assumptions, we reduce our 2023 net income estimates by CNY 2.4 billion-CNY 5.2 billion for the three airlines. We now forecast CNY 1.1 billion net income for Air China, CNY 2.6 billion net income for China Southern, but CNY 3.0 billion net losses for China Eastern.

As a result, we cut our fair value estimate by 2%-4% for the three airlines. We now value Air China at HKD 6.40 (CNY 5.90), China Southern at HKD 4.74 (CNY 4.36) and China Eastern at HKD 2.64 (CNY 2.42). Air China’s H share currently trades at 18% discount to our fair value estimate and is our preferred pick. We think Air China will outperform peers as air travel recovers, since it has the largest exposure to business and long-haul international routes.

According to Umetrip, an air travel data app, the international seat capacity and passenger traffic both rebounded to about 60% of 2019′s level in October. We think it is on track to reach 70% by year-end. On the other hand, international passenger yield is falling quickly with rising competition as global airlines add capacity and routes. Air fares are now back to pre-pandemic level for many short-haul international routes. As such, we cut our international passenger yield assumptions by 14% for China Southern and 13% for China Eastern. We keep our international passenger yield estimate for Air China since we have already factored in a 73% decline year on year in 2023, in line with our revised 75% and 72% decline for China Southern and China Eastern, respectively.