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Top carrier faces strong headwinds
China Eastern Airlines (0670) is still a long
way from winning investors confidence, in spite of a turnaround for 2007
after three years of losses.
The mainlands third largest carrier faces major challenges stemming
from high fuel prices, rising labor costs and slow traffic growth, say
analysts.
Earnings are heading in the right direction, however we are concerned
that rising fuel prices as well as labor costs will impede progress this
year, said Paul Dewberry, an analyst at Merrill Lynch.
Crude oil prices last Thursday hit a record high of US$115 (HK$897) a
barrel.
Merrill Lynch believes the price per barrel could hit US$125, and
average US$120 this year.
Labor costs will have an average rise of 10 percent annually per
employee over the next three years, driven by an acute shortage of
qualified pilots, added Dewberry.
Given the global economic slowdown and the negative wealth effects of
high inflation and a weak stock market in China, ABN Amro analyst Osbert
Tang predicted passenger traffic this year will only grow 10.4 percent,
versus 13.7 percent last year.
2008 looks likely to be another year of little more than operating
breakeven, said Dewberry, who revised down the carriers operating profit
forecasts for 2008 till 2010 by an average 400 million yuan (HK$444
million) each year.
The Shanghai-based airline reported a net profit of 268.9 million yuan
last year, in contrast to a net loss of 3.3 billion yuan in 2006, thanks
to the 6.5 percent yuan appr eciation during the year. Revenue rose 14
percent to 43.53 billion yuan from 38.21 billion yuan.
Excluding the exchange gain of 2.02 billion yuan and a smaller
revaluation loss of 130.9 million yuan, against 888 million yuan and 1.04
billion yuan, respectively, a year ago, China Eastern Airlines still
recorded a net loss of 1.6 billion yuan, compared with 3.2 billion yuan in
2006.
Weaker than expected yields and higher than expected staff costs have
depressed earnings more than 66 percent below market consensus. Its
international yields are rising but domestic fees are disappointingly
flat, Dewberry said.
Morgan Stanley analyst Edward Xu said strong headwinds in 2008, driven
by continuing high jet fuel prices, softening traffic demand due to lower
gross domestic growth, and the recent pilot crisis that is under
investigation by the authorities will see China Eastern continue to lag
its peers this year.
Chairman Li Fenghua said the carrier will try to tap the growing market
in China with an additional 19 aircraft this year, seeing growing travel
demand on the back of the Olympic Games.
Li aims to boost passenger numbers by 10 percent this year to 43
million and cargo volume by 14 percent to 1.07 million tonnes, according
to the statement.
China Eastern filled 73.6 percent of its available seats last year,
while passenger volume rose 11 percent to 39.2 million. The airline moved
939,700 tonnes of cargo in 2007, a rise of 6.7 percent.
But analysts believe the carrier will only continue to book a net
profit on yuan appreciation.
Excluding a forecast exchange gain of 2.23 billion yuan, the carrier
will still make a loss of 1.95 billion yuan in 2008, said Tang at ABN.
Moreover, the delay of a stake sale will weaken the carriers financial
position, said Tang at ABN.
We estimate China Easterns gearing will rise to 17 times this year,
from 14 times last year. We cut our earnings forecasts by 62 percent for
2008 and by 58 percent for 2009, he said.
China Easterns attempts to sell shares to Singapore Airlines and
Temasek were derailed by CNAC, parent of Air China.
Despite share price dipping substantially below Singapore Airlines
offer of HK$3.80 per share, analysts believe SIAs price is still not
enough to gain shareholders approval.
A larger discount is needed. A share price of HK$3 per share may be low
enough to trigger a second vote, Dewberry said.
Chinas Easterns shares plunged 10 percent in Shanghai and 6.8 percent
in Hong Kong on Friday after the countrys Civil Aviation Administration
said it was fining the carrier 1.5 million yuan because some its pilots
intentionally disrupted flights and inconvenienced hundreds of passengers.
2008-04-26 |
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