EUR 850.00 For Business Accounts Only

Morningstar | China Eastern's Shares Not Attractive Despite Cost Savings Ahead

We continue to see the China Eastern Airlines' Hong Kong listing as fairly valued and its Shanghai listing as overvalued as we awaiting its full-year results release at the end of March. Our no-moat rating is unchanged. The carrier booked very weak cargo demand during the fourth quarter of 2018, registering a 0.3% decline in cargo carried. Management expects a passenger capacity increase of 9% for 2019, a rate that we think should be matched by demand. The firm also expects to further reduce ex-fuel unit costs through optimizing utilization of aircraft. It’s worth noting that China Eastern 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 Eastern 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 Eastern still faces fierce competition from other domestic legacy carriers, such as China Southern 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.