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Morningstar | Like Its Peers, China Eastern Airlines Does Not Possess an Economic Moat

In terms of revenue and passenger-carrying capacity, China Eastern is ranked as the third-largest airline in the fast-growing, increasingly competitive Chinese airline market. Domestic competition is still on the rise, but the international markets are poised to become the company’s main revenue growth driver. We expect China Eastern’s net income and revenue to grow at 27% and 6% per year, respectively, between 2018 and 2022. The positive net income growth catalysts include favorable jet-fuel pricing, increasing direct-channel sales to shave costs, and lower foreign exchange losses on accelerating U.S. dollar denominated debt retirement. Although the firm is a member of the triopoly in the fast-growing Chinese market, we do not believe China Eastern has an economic moat, given nonexistent switching costs, low customer loyalty, and rising cannibalization from the high-speed railway network. Additionally, meaningful top-line growth requires intensive capital investment, and management has little control over important external cost drivers such as fuel cost inputs and foreign exchange movement, leading to our high uncertainty rating. Domestically, China Eastern’s dominant presence in the prosperous Yangtze River Delta should help the company maintain mid-single-digit top-line growth. The opening of Shanghai Disneyland, with annual capacity of 30 million to 50 million visitors, bodes well for the company and provides further top-line upside. Additionally, China Eastern is expanding its coverage of lower-tier cities via its subsidiaries or significant equity investment in smaller regional airlines. Still, we anticipate the domestic passenger yields to decline over the next five years as a result of intense competition from both other major airlines and high-speed railway.Going forward, we expect the overseas market to become the main growth driver for the carrier from 2019 to 2023. The international passenger yield will likely to drop in the long term, as Morningstar's oil price forecast points to a total 15% dip in Brent over the next five years.