CMSC: The aviation sector has reached a supply-demand bottom. Focus on the industry's 26-year profit elasticity.

CMSC released a research report stating that the trend of future recovery of supply and demand in the aviation industry and the rebound in profitability is clear. From a medium to long-term perspective, the continuous increase in industry profitability will provide support for market value recovery. In the short term, benefiting from demand growth and stabilizing ticket prices, Q4 is expected to see a significant reduction in losses year-on-year, making 2025 potentially the first profitable year for major airlines; the 2026 Spring Festival transport season is expected to benefit from demand growth, a decrease in aviation fuel prices year-on-year, and a substantial increase in profits year-on-year, with the entire year of 2026 expected to be the first year of releasing profit elasticity for major airlines. Key points from CMSC: Industry Review in 2025: Supply and demand stabilize, domestic ticket prices essentially stop falling throughout the year (1) Due to the growth of aircraft fleet size and utilization rate recovery, from January to November 2025, the industry's ASK increased by 6% year-on-year, compared to +17.1% in the same period in 2019. As the gap in utilization rate narrows, the normalization of industry capacity growth is gradually slowing down; (2) Benefit from the rapid recovery of international routes, aviation demand maintained rapid growth in 2025. From January to November 2025, the national civil aviation passenger turnover increased by 8.3% year-on-year, compared to +19.6% in the same period in 2019; domestic civil aviation passenger turnover increased by 4.5% compared to 2024, compared to +25.5% year-on-year in 2019; international civil aviation. Passenger turnover increased by 22.9% compared to 2024, compared to +3.6% in 2019; (3) Benefiting from the growth in demand, the industry's passenger load factor continued to hit new highs in 2025. The average passenger load factor of the entire civil aviation industry from January to November 2025 was 85.2%, an increase of 1.8 percentage points year-on-year and of 1.8 percentage points compared to the same period in 2019; (4) High season ticket prices in 2025 are under pressure year-on-year, while low season prices are expected to benefit from concentrated private demand release and a lower base, with ticket prices performing better year-on-year than in the high season. Overall, domestic bare ticket prices are expected to essentially stop falling throughout the year, with Q4 expected to achieve double-digit increases in bare ticket prices and all-inclusive ticket prices. According to Flight Manager data, the average bare ticket price in 2025 was 704 yuan in the first 50 weeks (January 3, 2025 to December 18, 2025), a decrease of 1.8% year-on-year compared to 2024; The ticket price was 717 yuan, a decrease of 5.5% year-on-year compared to 2024. Since Q4, the year-on-year increase in bare ticket prices has been 2.9%, and the year-on-year increase in all-inclusive ticket prices has been 2.5%. With ticket prices turning positive year-on-year in Q4, this indicates that under the background of rapid demand growth, the single quarter has achieved a supply-demand reversal. Looking to the Future: Supply and demand reversal, improvements in oil and exchange rate conditions (1) Supply side: Assuming the comprehensive growth rates of aircraft introduction and aircraft utilization hours, it is estimated that from 2025 to 2027, the industry's supply will grow at an average annual compound growth rate of 5.2%; (2) Demand side: Assuming the comprehensive domestic and international demand, it is estimated that the industry's demand will grow at an average annual compound growth rate of more than 6.6% from 2025 to 2027. With a comprehensive consideration of both supply and demand, it is expected that the industry's supply-demand relationship will continue to improve from 2025 to 2027, driving the improvement of industry revenue levels and profitability; (3) Looking ahead to 2026, benefiting from increased oil production and progress in peace negotiations between Russia and Ukraine, oil prices are expected to further decline, while the RMB is expected to continue to appreciate moderately, promoting profit improvement. Improvement in industry supply and demand from 2025 to 2027, with a clear medium-term upward trend On the demand side, the industry is at the stage of recovery after the epidemic, and travel consumption demand has a certain degree of resilience. Stable economy and consumption stimulus policies are favorable for the growth of domestic travel demand, and visa-free policies are expected to accelerate the growth of international route demand. On the supply side, affected by the disruption of the global aircraft supply chain, the release of supply is slightly tight, the size of the civil aviation fleet is expected to maintain stable growth, the growth rate of supply continues to slow down, and supply and demand will improve. Oil and exchange rate factors: With the advancement of OPEC+ organization's production increase, oil prices are expected to continue to decline year-on-year, directly reducing costs, benefiting demand recovery and profit growth; at the same time, the RMB is expected to continue to appreciate in 2026, driving profit improvement. Looking ahead, the trend of industry supply and demand recovery and profit rebound is clear. From a medium to long-term perspective, the continuous increase in industry profitability will provide support for market value recovery. In the short term, benefiting from demand growth and stabilizing ticket prices, the off-peak season is expected to see a significant reduction in losses year-on-year, making 2025 potentially the first profitable year for major airlines; the 2026 Spring Festival transport season is expected to benefit from demand growth, a decrease in aviation fuel prices year-on-year, and a substantial increase in profits year-on-year, with the entire year of 2026 expected to be the first year of releasing profit elasticity for major airlines. Risk warning: Macroeconomic growth is lower than expected; supply growth exceeds expectations; international route recovery is slower than expected; significant increase in oil prices and sharp depreciation of the RMB.