Guotai Junan: Aviation expectations still at a low level, visa-free policy and domestic demand boost expected to accelerate supply and demand improvement.

Guotai Junan issued a research report stating that the aviation sector is still at a low level, and it is recommended to increase holdings in aviation stocks. In the long term, the demand for aviation in China is huge, and airspace constraints persist. Once supply and demand recover, considering the marketization of ticket prices and the slowdown in fleet growth, an increase in profitability can be expected. The trend of supply and demand recovery in the Chinese aviation industry is expected to be confirmed by 2025. The trend of reducing domestic flights and increasing international flights in the new aviation season continues, and visa exemption policies and domestic demand are expected to accelerate the improvement in supply and demand. Guotai Junan's main points are as follows: 2024: Fleet turnover and load factor are basically restored, airlines prioritize load factor over price to increase volume. 1) Passenger flow: Benefiting from the year-on-year increase in fleet turnover, industry passenger traffic in the first 11 months increased by 18% compared to the same period in 2019, an 11% increase from 2019. Considering that ticket prices have only slightly decreased compared to 2019, this reflects the acceleration of aviation demand (volume * price). 2) Supply and investment: In the first 11 months, industry available seat kilometers (ASK) increased by 10% compared to 2019, approaching the growth rate of static fleet seat numbers, and fleet turnover has basically recovered. ASK for the three major airlines in the first 11 months increased by 19% domestically and 87% internationally compared to 2019. 3) Load factor: In the first 11 months, the industry load factor was 83%, the same as in 2019, with the second half of the year continuing to exceed 2019, and the load factors in Q4 were significantly higher than the same period in 2019. 4) Ticket prices: In 2024, airlines implemented a strategy of prioritizing load factor for revenue, leading to a year-on-year decrease in domestic passenger revenue; this decrease compared to 2019 was mainly due to longer domestic flight distances and a cautious revenue strategy in Q4. 2024 Q4: Significant improvement in oil price pressure, expected to see a significant reduction in losses compared to the off-season. 1) Domestic ticket prices in November and December typically fall seasonally, even below Q2 levels, which the report believes is in line with oil price trends. 2) International oil prices in Q3 2024 have significantly decreased, and due to the lag in adjustment of domestic aviation fuel prices, it is estimated that the average domestic aviation fuel prices in Q4 2024 will decrease by 24% year-on-year. 3) Reduction in fuel costs will depend on supply and demand. It is estimated that the "net fuel price" (including fuel price - average fuel cost per person) in Q4 2024 will increase by over 30% year-on-year, reflecting a significant reduction in losses in the off-season year-on-year. Preview of the Spring Festival travel season: The presale for the Spring Festival travel period has begun recently, and the industry expects an optimistic supply and demand situation. 1) In 2025, the Spring Festival holiday will be one day longer and can be combined with other holidays, leading to an expected strong demand for air travel with limited additional flights. The industry expects an optimistic supply and demand situation, combined with improved pressure on oil prices, which may result in greater-than-expected profit elasticity. 2) Expectations for the pre-holiday overlapping of various passenger flows such as winter sports, students on break, family visits, and business travel; there may not be a significant peak during the holiday period; the return flow after the holiday is expected to be relatively dispersed. 3) It is suggested that the high base for ticket prices during the 2024 Spring Festival travel season and the possible decrease in oil prices and fuel surcharges may lead to a year-on-year decrease in ticket prices, and it is recommended to pay attention to the "net fuel price" to more accurately reflect profitability trends. Strategy: Focus on the long-term logic of aviation, which is still at a low level, recommend increasing holdings in the aviation sector. 1) In the long term, the demand for aviation in China is huge, and airspace constraints persist. Once supply and demand recover, considering the marketization of ticket prices and the slowing fleet growth rate, an increase in profitability can be expected. 2) The trend of supply and demand recovery in the Chinese aviation industry is expected to be confirmed by 2025. The trend of reducing domestic flights and increasing international flights in the new aviation season continues, and visa exemption policies and domestic demand are expected to accelerate the improvement in supply and demand. 3) Aviation has the option of lower oil prices. It is expected that significant reductions in losses during the off-season will lead to greater-than-expected profit elasticity during the peak season, potentially catalyzing optimistic expectations. 4) Aviation is still at a low level, recommend increasing holdings in the aviation sector. Risk factors: Economic fluctuations, industry policies, geopolitical situations, oil prices, exchange rates, safety accidents, etc.