Asian Airlines' Recovery Faces Some Turbulence -- Talking Markets

Dow Jones2022-08-18
 

By Clarence Leong

 

Asian carriers are starting to see some green shoots in their earnings after more than two years of contraction, but they are still a long way off from blooming amid high oil prices and operational constraints.

Pent-up travel demand has gathered pace since the start of this year as countries gradually reopened their borders. Still, analysts warned that a resurgence of Covid-19, industry competition and rising fuel prices may limit growth expectations.

Given solid business travel demand and the industry's recovery in Asia, this could be a "good time to accumulate airline exposure selectively," RBC Wealth Management portfolio manager Toh Tat Wai said.

However, he prefers airport stocks due to potential headwinds facing airlines.

Earlier this month, Fitch Solutions raised its 2022 global average jet fuel price forecast by 5% to US$141 a barrel, compared with an average of US$73.3 a barrel in 2021, as consumption remained buoyant.

Despite that, limited airport capacity "have seen airlines buckle in the wake of strong demand for air travel muting the strong rebound in jet fuel consumption so far in 2022," it said in a note.

In Asia, Singapore Airlines Ltd. has been an outperformer, posting its second-highest quarterly operating profit in the three months to June. Rival Cathay Pacific Airways Ltd. reported a narrower first-half loss of 5.00 billion Hong Kong dollars (US$637.5 million) versus a loss of HK$7.57 billion a year ago.

Others, including Japan Airlines Co. and Korean Air Lines Co., have also seen their earnings improve on a year-on-year basis, though Chinese airlines are struggling due to the continuation of Beijing's strict zero-Covid policy.

Airlines are still operating far fewer flights than before the pandemic and planning to build capacity. Cathay is aiming to ramp up its passenger flight capacity to 25% of pre-Covid levels by year-end, besides planning to hire more staff over the next two years to prepare for growing travel demand.

Cathay has come a long way over the past two years as it was "almost life and death at one point," and the stock was oversold, Chartwell Capital's founder and Chief Investment Officer Ronald Chan said.

Mr. Chan, however, said high oil prices could erode Cathay's profit margins. Its shares have gained 35% this year, outperforming the broader Hang Seng Index, which is down 16% year-to-date.

HSBC analyst Parash Jain, who is bullish on Cathay, said in a note that the recent decision by Hong Kong to reduce quarantine time might mean that a complete withdrawal of quarantine could come earlier than the market speculated in November.

 

Write to Clarence Leong at clarence.leong@wsj.com

 

$(END)$ Dow Jones Newswires

August 18, 2022 04:36 ET (08:36 GMT)

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