CITIC SEC: Currently, the valuation of airlines is quite attractive, and it is recommended to lay out strategies during the off-season.

CITIC SEC released a research report stating that, according to Flight Butler, the number of civil aviation passengers increased by 7.4% year-on-year. After the Spring Festival travel rush, the demand for public and business travel accelerated to recover. By the end of the Spring Festival, ticket prices had turned positive year-on-year and pre-sale data had improved month-on-month. Expectations of a recovery in consumer spending and the accelerated development of new productivity will drive travel demand, and industry self-discipline may provide support for ticket prices. If there is a ceasefire between Russia and Ukraine, it will further enhance the restoration of air routes between China and Europe and China and the United States. According to calculations, for every 10% increase in flights on American routes, the utilization rate of wide-body aircrafts will increase by 0.1-0.2 hours, benefiting the three major airlines. Geopolitical changes are putting pressure on oil prices, with the average price of aviation kerosene in the first two months of 2025 dropping by 9.8% year-on-year, making oil prices the most direct factor for driving profitability. At present, airline valuations are quite attractive, so it is recommended to tactically lay out during the off-peak season. The recovery of public and business travel demand after the Lantern Festival may be an important support for the recent rebound in domestic flights. Reviewing historical short-term trends in public and business travel demand may be an important observation indicator. According to Flight Butler, during the 2025 Spring Festival, a total of 90.2 million passengers were transported by civil aviation, an increase of 7.4% year-on-year, and a 23.8% increase compared to the same period in 2019, with domestic/international passenger volumes increasing by 5.2%/34.5% year-on-year, respectively. The market is paying close attention to the situation of public and business travel after the Spring Festival. Taking the Beijing-Shanghai route as an example, historical data shows that the volume of public and business passenger transport starts to decline around the 20th day of the twelfth lunar month, then rises after the New Year, and peaks around the 10th day of the first lunar month with the start of new year's business activities. Comparing the average passenger volume on the Beijing-Shanghai route in the first 10 days before the 15th day of the twelfth lunar month and the first 10 days after the 15th day of the first lunar month, the ratios for 2019/2024/2025 are 99.3%/88.7%/92.4%, indicating that the increase in public and business passengers after the Lantern Festival in 2025 is faster than the previous year, driving the normalization of ticket prices at the end of the Spring Festival (according to Flight Butler, ticket prices decreased by 11.3% year-on-year throughout the Spring Festival period). The improvement in domestic consumer expectations since the beginning of the year, coupled with accelerated resumption of work and production, has boosted the demand for business travel, leading to improved pre-sale ticket price data. The recovery of short-term public and business travel demand may be an important observation indicator. Expectations of further restoration of China-US air routes in 2025, with a repaired long-haul route benefiting airline unit cost optimization. According to Flight Butler, the recovery rate of international flights in the first 8 weeks of 2025 was 90.3%, with a 29.3% increase in the number of international flights during the Spring Festival period compared to the previous year, with a recovery rate of 89.5%. Among them, the proportion of flights to Southeast Asia and East Asia was 43.4% and 34.3%, with recovery rates of flights to Japan, South Korea, Thailand, Europe, and the United States at 113.9%, 89.4%, 71.0%, 111.0%, and 30.4% respectively. Compared to the end of 2024, the number of flights to Japan has increased, while the number of flights to Thailand has decreased slightly due to security incidents. Since the phone call between the US and Russian leaders, negotiations for a ceasefire between Russia and Ukraine have accelerated. If a ceasefire is achieved, international flights affected by the Russian airspace ban, such as those between China and France, China and Germany, and China and the United States, may see a restoration. Flights that were rerouted by Chinese airlines for equivalence reasons may also be expected to resume operations. According to Flight Butler, the utilization rate of wide-body aircraft during the Spring Festival period was 10.5 hours, still 0.7 hours lower than in 2019 (compared to the utilization rate of narrow-body aircraft, which has remained the same as in 2019). The slower recovery of routes to North America is the main factor suppressing the utilization rate. According to calculations, a 10% recovery of American routes corresponds to an increase in the utilization rate of wide-body aircraft by 0.1-0.2 hours, with clear benefits for the cost dilution of major airlines. The Civil Aviation Administration of China predicts that the number of international flights in 2025 will recover to over 90% of pre-pandemic levels, with attention to the positive impact of geopolitical changes on long-haul routes. Sanctions against Iran may accelerate the increase in OPEC production in 2Q25, easing the pressure on aviation fuel costs and directly catalyzing profits for airlines. Geopolitical changes have led to significant fluctuations in international oil prices in the near term, with the reduction of Middle East risk premiums and expectations of a ceasefire between Russia and Ukraine putting pressure on oil prices. According to Wind, the average price of aviation kerosene from the factory in January-February 2025 decreased by 9.8% compared to the same period last year. Aviation fuel costs are the most direct factor affecting airline profitability. Based on the estimated aviation fuel costs for 2024, if the price of aviation kerosene drops by 10% year-on-year, airlines will directly benefit from increased ticket revenue. At the same time, with the decline in international oil prices, the standard for domestic fuel surcharges will also decrease, reducing additional expenses for passengers. With the same willingness to pay (assuming the full ticket price remains the same), airlines will receive higher ticket revenue. Risk factors: Travel demand falling below expectations; International route recovery falling short of expectations; Unexpected impact of oil and exchange rates.