EUR 850.00 For Business Accounts Only

Morningstar | China Southern's Shares Don't Look Too Attractive Despite Cost Savings Ahead

We continue to see China Southern as fairly valued as we await its full-year results release at the end of March. Our no-moat rating is unchanged. Since October 2018, the airline’s growth in cargo supply has consistently outpaced that of demand by an average of almost 700 basis points. We believe the underperformance in cargo might have been affected by the U.S.-China trade war. Management continues to guide for a passenger capacity increase of a low teens percentage for 2019, a rate that’s faster than those of the previous two years. It’s also worth noting that China Southern is set to relocate from Beijing Capital International Airport to the new Beijing Daxing International Airport starting in late 2019. We think yields might come under a little bit of pressure during the three years of relocation as China Southern offers ticket discounts to attract travelers to the new airport, which is further away.

We continue to believe that minimal switching costs and low entry barriers make it extremely difficult for airlines to retain competitive advantages in the industry. Even with the largest flight capacity and extensive global coverage, China Southern still faces fierce competition from other domestic legacy carriers, such as China Eastern and Air China. Air travel has been further commoditized following the emergence of high-speed railway, which renders regional travel (500-800 kilometers) unprofitable for top airline carriers.