Against the backdrop of tourism recovery, Air China issued an unsatisfactory performance forecast.
According to China News Network, on January 22, flight CA1825 from Beijing to Changzhou failed to remove the nose landing gear safety pin due to the negligence of Air China staff, resulting in the front landing gear of the aircraft could not be recovered normally, and the crew disposed of the plane back to the plane according to the procedure. On January 23, Air China's official Weibo issued an apology, saying that it would immediately initiate rectification and seriously pursue responsibility.
Normally, such a safety incident in an airline will bring a certain period of shock to the stock price, but unexpectedly, Air China's stock price recorded a wave of four consecutive rises after falling 4.12% on the day of the incident.
As of the close of trading on January 26, Air China closed up 2.29% again, with a closing stock price of 7.59 yuan per share and a total market value of 123 billion yuan. However, the stock price has fallen by 74% compared with its peak of 29.06 yuan, and the market value has evaporated by nearly 350 billion yuan. In the context of tourism recovery, what happened to Air China?
After three consecutive years of losses
In fact, Air China's performance in 2023 is good. According to the financial report, in 2022, revenue and net profit will decline by 29.03% and 132.06% respectively, and in the first three quarters of 2023, it will achieve contrarian growth. In the first three quarters of 2023, Air China's revenue was 105.5 billion yuan, an increase of 150.61% from 42.09 billion yuan in the same period of the previous year, and the net profit in the first three quarters was 791.4 million yuan, compared with a loss of 28.1 billion yuan in the same period of the previous year, an increase of 102.82%. Among them, the growth rate of revenue and net profit both hit the highest growth rate in the past decade.
According to the financial report, in the past four full fiscal years from 2019 to 2022, Air China's revenue growth rate was -0.43%, -48.96%, 7.23% and -29.03% respectively, of which the three years of 2019, 2020 and 2022 were negative. In terms of net profit, Air China has experienced negative growth for four consecutive years, falling by 12.65%, 324.85%, 15.50% and 132.06% respectively.
Although the aviation industry has been severely affected by the pandemic, Air China is different from other airlines. According to the financial report, Air China's revenue declined in 2019, and this year's revenue growth of China Southern Airlines was 7.45%, and China Eastern Airlines' revenue growth was 5.6%, and among many airlines, it is rare to see a revenue decline in 2019. However, from 2020 to 2022 after the start of the epidemic, almost all airlines suffered a heavy blow in performance, with revenue and net profit both suffering from declines except for revenue growth in 2021. China Southern Airlines' revenue growth from 2020 to 2022 was -40.02%, 9.81% and -14.35%, and its net profit declined in the same period, with declines of 508.98%, 11.63% and 170.03%, while China Eastern Airlines and China Southern Airlines were similar, with revenue falling by 51.48% in 2020, 14.48% in 2021, and 31.31% in 2022. During the same period, China Eastern's net profit fell by 470.42%, 3.20% and 206.09% respectively.
With the stabilization of the epidemic, the tourism industry has gradually recovered, which has led to the recovery of the aviation industry. According to the financial report, in the first three quarters of 2023, Air China has achieved positive growth in revenue and net profit in each quarter. Among them, the revenue in the first quarter was 25.07 billion yuan, a year-on-year increase of 94.06%, and the net profit was -2.926 billion yuan, a year-on-year increase of 67.12%. Although the net loss in the first quarter was 2.926 billion yuan, it was significantly narrower than the net loss of 8.9 billion yuan in the same period last year. In the second quarter, Air China's revenue was 34.55 billion yuan, a year-on-year increase of 213.05%, and its net profit was -524.3 million yuan, a year-on-year increase of 95.02%, which continued to narrow. In the third quarter, Air China's revenue was 45.86 billion yuan, a year-on-year increase of 152.89%, and its net profit was 4.242 billion yuan, a year-on-year increase of 148.94%. This is also the first time in nearly 15 quarters that Air China's net profit has been positive.
It is undeniable that the epidemic has had a huge impact on the performance of airlines, and the continuous losses have made many airlines begin to reduce operating costs, and even reduce salaries to maintain them.
Reducing costs does not necessarily increase efficiency
According to the financial report, Air China's total operating costs in 2022 will be 101.9 billion yuan, an increase of 2.55%. Compared with 99.34 billion yuan in 2021, it increased by 2.56 billion yuan, but compared with 131.3 billion yuan in 2019 and 131.8 billion yuan in 2018, it decreased by nearly 30 billion yuan. In 2019, Air China's sales expenses were 6.637 billion yuan, while in 2022, the expenses were reduced to 3.53 billion yuan, and in 2021, the sales expenses were 4.452 billion yuan, a year-on-year decrease of 20.70% in 2022. R&D expenses also decreased from 491.4 million yuan in 2019 to 243.6 million yuan in 2022, almost half of 2019.
The decline in selling expenses had a direct impact on Air China's performance. According to the financial report, the recovery of performance in the first three quarters of 2023 is related to the recovery of its sales expenses. In the first three quarters of 2023, Air China's sales expenses were 3.996 billion yuan, an increase of 47.31% from 2.713 billion yuan in the same period of the previous year. In the first three quarters of 2023, the financial expenses were 6.363 billion yuan, a decrease of 32.05% compared with 9.363 billion yuan in the previous year.
As can be seen from the financial report, overall, Air China's operating costs in the first three quarters of 2023 have increased significantly, with a total operating cost of 111.9 billion yuan compared with 76.94 billion yuan in the same period of the previous year, an increase of 45.46%. At the same time, R&D expenses also increased from 126.2 million yuan in the same period of the previous year to 213.8 million yuan, a year-on-year increase of 69.45%.
After three consecutive years of "cost reduction", Air China's performance has not improved, and in 2023, with significant increases in operating costs and selling expenses, Air China's revenue and net profit in the first three quarters of 2023 have ended negative growth for several consecutive quarters. In the case of net losses for three consecutive years, the net profit in the first three quarters of 2023 will be 791.4 million yuan, which is somewhat low compared with the net profit of more than 6 billion yuan in the same period before 2019, but it sends a positive signal.
The earnings forecast is a loss again
Air China should note that the gross profit margin and net profit margin in the first three quarters of 2023 have declined significantly compared to previous years when the net profit was positive. The gross profit margin for the first three quarters of 2023 was 7.70% and the net profit margin was only 1.13%. In the previous three years, the net profit margin was negative due to continuous losses, while the net profit margin in the same period from 2017 to 2019 was 10.45%, 7.74% and 7.38% respectively, and the net profit margin in the first three quarters of 2023 was significantly lower than the previous net profit margin of more than 7%. The good news is that Air China's net profit margin in the first three quarters of 2023 was -13.06%, -2.24% and 11.41%, and the net profit margin is gradually recovering, especially in the third quarter of 2023, which is almost the same as before the epidemic.
On the evening of January 26, Air China released a performance forecast, expecting the company to lose money in 2023, with a net loss attributable to shareholders of listed companies of about RMB 900 million to RMB 1.3 billion, and a net loss of about RMB 2.7 billion to RMB 3.7 billion after deducting non-net profit. Combined with the net profit of 791.4 million yuan in the first three quarters of 2023, the net profit after deduction was -873.1 million yuan, which means that in the fourth quarter of 2023, Air China's net loss will be between 1.6 billion yuan and 2 billion yuan, and the net loss after deduction of non-net profit will be 1.8 billion yuan to 2.8 billion yuan. The amount of net profit loss in a single quarter has narrowed significantly compared with previous years, but it is somewhat regrettable for Air China, which has been profitable in the first three quarters, but failed to turn a profit in the fourth quarter.
Air China seized the opportunity of market recovery to further improve quality and efficiency, and insisted on "increasing insurance prices" to promote revenue growth. At the same time, Air China also emphasized strict control of costs and expenses, and the idea of persisting in living a "hard life". Strengthening the integration of resources and improving the management mechanism under coordinated development are the fundamental reasons for the sharp narrowing of losses in 2023.
Air China also disclosed a variety of reasons for its continued losses in 2023, mainly due to intensified competition in the domestic market, the fact that international routes have not yet fully recovered due to objective reasons, and oil prices and exchange rates. As stated in Air China's performance expectations, China Southern Airlines made a net profit of 1.320 billion yuan in the first three quarters of 2023, with a non-net profit of -151 million yuan, while China Eastern Airlines' net profit was -2.607 billion yuan and non-net profit of -3.201 billion yuan in the same period. The situation of the two companies is basically similar to that of Air China, and the overall operation of the whole of 2023 is basically a loss-making operation, and the amount of loss has narrowed significantly.
Institutions are optimistic, but risks remain
After Air China released its third quarter 2023 report, many institutions gave Air China a "buy" rating. Among them, Zhang Gong and Zhang Ying, analysts of Capital Securities, believe that Air China made a profit of 4.242 billion yuan in the third quarter, turning losses into profits in a single quarter, with bright growth and give buy ratings. Zuo Qianming, an analyst at Cinda Securities, pointed out in the company's in-depth report that Air China, as the only domestic flag-carrying airline, has short-term pressure on its performance, but the advantages of the flag-carrying airlines have not diminished, and the future performance is expected to be flexible, and he also gave a "buy" rating.
Zhao Xudong, an analyst at Qunyi Securities, pointed out in the research report that Air China's fixed increase funds will be used to purchase domestic large aircraft, and the company's capacity is expected to continue to rise. A total of 6 billion yuan was raised in this A-share offering, of which 4.2 billion yuan (total purchase amount of 7.571 billion yuan) will be used to introduce 17 aircraft, including 6 C919 and 11 ARJ21, and the remaining 1.8 billion yuan will be used to supplement liquidity. As of the end of November 2023, the company has a total of 900 aircraft in operation, and this fixed increase will further increase the scale of the company's fleet, and match the volume of domestic trunk and regional lines, which will help the company's profit center to rise.
In terms of the recovery of international routes, Qunyi Securities believes that due to factors such as long visa cycles and frequent international political events, Air China's international routes have only recovered to about 50% of the pre-epidemic level, and with the implementation of the visa-free policy in mainland China and the resumption of international flights such as China and the United States, it is expected that international routes will further recover in 2024. With the further recovery of international routes, the utilization rate of Air China's wide-body aircraft will also be further improved, and the unit cost is expected to improve, and the profitability elasticity is expected to be released next year, according to the research report.
A number of research reports have clearly stated in the risk warnings that "demand recovery is less than expected, geopolitical conflicts, safety incidents, and oil price fluctuations" will be the main factors affecting Air China's future performance.
In the context of the gradual recovery of the Chinese and global tourism markets, Air China's performance has rebounded significantly, but in the context of the continuous recovery of tourism consumption in 2024, Air China can fly even higher in the context of the continuous recovery of tourism consumption in 2024.
Author | Mowgli