Zheshang: Oil prices double up, supply restricted. Suggest buying into the airline industry when the price is low.

Zheshang released a research report stating that the aviation industry's big cycle has just started, with demand, oil prices, and exchange rates all gaining momentum. It is recommended to position oneself low in the market. At the beginning of the year, the performance of passenger traffic and ticket prices were disrupted by a high base, and the market's previous pessimism about oil prices and exchange rates caused the stock prices of the aviation sector to decline. In the short term, the industry is entering the traditional low season, with continued tight supply and the potential for a turnaround in ticket prices due to the low base effect, coupled with marginal improvements in oil prices and exchange rates. In the medium to long term, the industry's limited supply is expected to be persistent, demand is expected to grow steadily, the supply-demand relationship is about to reverse, and high profit elasticity can be expected. It is recommended to position oneself low. Recommendations: Air China Limited (601111.SH), China Southern Airlines (600029.SH), Juneyao Airlines (603885.SH), Spring Airlines (601021.SH), China Express Airlines (002928.SZ). Zheshang's main points are as follows: Oil and exchange rate assistance: Oil prices hit a three-year low, while the renminbi continues to rebound. Oil prices hitting a three-year low, expectations of marginal improvements, easing cost pressures on airlines. On March 5, 2025, the closing price of Brent crude oil was $69.30 per barrel, the second lowest point since 2022 (the lowest point was $69.19 per barrel), with oil prices hitting a near three-year low during trading, a 46% drop from the peak over the past three years. Since 2022, OPEC+ has reduced production by 5.85 million barrels per day (equivalent to 5.7% of global supply) in stages. In June 2024, OPEC+ announced a gradual restart of production increases, but the production increase plan has been continuously postponed, and in December 2024, the most recent round of production cuts was extended to the first quarter of 2025. According to Bloomberg, on March 4, 2025, OPEC+ announced plans to proceed with the April production increase in oil, deciding to increase production by 138,000 barrels per day starting in April, with the goal of gradually increasing total crude oil production by 2.2 million barrels per day by 2026. According to the mid-2024 reports of the three major airlines, a 1% decrease in oil prices from the first half of 2024's average purchase price is expected to increase net profit by 3.5-4.2 billion yuan for the full year. The renminbi has appreciated for three consecutive trading days and is expected to perform better than previously pessimistic market expectations, with airlines possibly recording exchange gains in the first quarter of 2025. On March 6, 2025, the mid-point exchange rate for the US dollar against the renminbi was 7.1692, with the renminbi appreciating for three consecutive trading days, a 0.27% appreciation since the end of 2024, with exchange gains expected to boost airline performance. According to the mid-2024 reports of the three major airlines, a 1% appreciation of the renminbi is expected to increase net profit by 2.1-3.2 billion yuan. Supply and demand: The supply gap continues to widen, with ticket price elasticity on the horizon. Supply side: Boeing/Airbus capacity bottlenecks are difficult to resolve, engine defects may lead to a growth rate of less than 1% in supply by 2025. The introduction of incremental airplanes in the industry is constrained by upstream capacity bottlenecks, and the parking rate of existing airplanes is elevated due to engine defects and shortages of engines/materials. 1) Airbus: in 2024, delivered 766 aircraft, slightly below the target of 770 aircraft, and is expected to deliver 820 civilian aircraft in 2025, accounting for 95% of the delivery volume in 2019. 2) Boeing: due to supply chain bottlenecks/manufacturing defects/strikes, capacity recovery is slower than Airbus, with 348 aircraft delivered in 2024, a year-on-year decline of 35%. 3) Engines: The CEO of Rolls-Royce stated when forecasting 2025 guidance that supply chain constraints for components would continue, with supply chain issues expected to persist for 12-18 months. According to the fleet introduction plans of airlines from 2024 to 2026, combined with the actual situation where the fleet introduction in 2024 did not meet expectations, it is estimated that the supply growth rate of the industry in 2025 may be below 1%. Demand side: A combination of domestic policies emerged, with the PMI in February 2025 reaching 50.2, returning to expansion territory, and a year-on-year increase in spring airline passenger volume of 7.4% in 2025. The industry's supply-demand relationship is reversing, and a turning point in ticket prices is on the horizon. Risk warning Risks of demand falling short of expectations, significant oil price increases, depreciation in exchange rates.