Potential Growth of China Eastern Airline (CEA)

COVID-19 pandemic has certainly given the airline industry a heavy blow, but as winter comes to an end and vaccines become more widely available, quarantine restrictions will eventually loosen up. Although the industry is not likely to fully recover within the next few years, it is going to start restoring bit by bit. The US still has a lot of active COVID cases, therefore it might be too early/too risky to invest in US airline companies. However, airline companies from countries that have COVID relatively in control (ie. China) is a less risky investment. Chinese Eastern Airline (CEA) is a great option, it has been flying many international routes that other airlines had limited access to while maintaining stable amounts of domestic flights. The year-on-year change of weekly flight frequency of CEA only reduced by about 5% for the last quarter of 2020, compared to the ~40% decrease in the USA. Flight frequency is not the most comprehensive indicator to analyze airline companies, RASM (Revenue per available seat mile) combined with CASM (Cost per available seat mile) is the most important number to evaluate when comparing the operating efficiency of the airline. The RASM* of the CEA has raised against the trend by 3.7% year-over-year.  From this facet, CEA has a strong strength.  The Debt and Equity ratio of CEA significantly outperforms most US airlines as well. Airline industry is considered to have one of the highest D/E ratios. Due to the detrimental effects of the pandemic, many airlines such as Delta(DAL)’s  D/E ratio have skyrocketed to 22.56 by the end of September. In the same quarter, China Eastern Airline still maintains a steady low 3.74 with no significant fluctuation compared to pre-covid times. CEA is at an advantaged state compared to other major airlines, at least it can operate without significantly compromising the shareholder’s equity. Currently, CEA is sitting at $21.50, which is still about 20% lower than its pre-covid price (fluctuating between $24-$27). It is likely to decrease a little bit more due to the new travelling restrictions in China, but it definitely has the potential to go back up to its pre-covid level in the next 3-6 months. If purchase right before the travelling restriction gets lifted (which is likely to be late February to March - after Chinese New Year), an even higher gain could be captured.  *RASM CEA technically calculates this using revenue per available seat kilometer, but the idea still stands. 

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Potential Growth of China Eastern Airline (CEA)

Feb 7, 2021

bullish

general Analysis

[2 min Read]

blog post cover photo

COVID-19 pandemic has certainly given the airline industry a heavy blow, but as winter comes to an end and vaccines become more widely available, quarantine restrictions will eventually loosen up. Although the industry is not likely to fully recover within the next few years, it is going to start restoring bit by bit. The US still has a lot of active COVID cases, therefore it might be too early/too risky to invest in US airline companies. However, airline companies from countries that have COVID relatively in control (ie. China) is a less risky investment. Chinese Eastern Airline (CEA) is a great option, it has been flying many international routes that other airlines had limited access to while maintaining stable amounts of domestic flights. The year-on-year change of weekly flight frequency of CEA only reduced by about 5% for the last quarter of 2020, compared to the ~40% decrease in the USA. Flight frequency is not the most comprehensive indicator to analyze airline companies, RASM (Revenue per available seat mile) combined with CASM (Cost per available seat mile) is the most important number to evaluate when comparing the operating efficiency of the airline. The RASM* of the CEA has raised against the trend by 3.7% year-over-year. From this facet, CEA has a strong strength.

The Debt and Equity ratio of CEA significantly outperforms most US airlines as well. Airline industry is considered to have one of the highest D/E ratios. Due to the detrimental effects of the pandemic, many airlines such as Delta(DAL)'s D/E ratio have skyrocketed to 22.56 by the end of September. In the same quarter, China Eastern Airline still maintains a steady low 3.74 with no significant fluctuation compared to pre-covid times. CEA is at an advantaged state compared to other major airlines, at least it can operate without significantly compromising the shareholder's equity.

Currently, CEA is sitting at $21.50, which is still about 20% lower than its pre-covid price (fluctuating between $24-$27). It is likely to decrease a little bit more due to the new travelling restrictions in China, but it definitely has the potential to go back up to its pre-covid level in the next 3-6 months. If purchase right before the travelling restriction gets lifted (which is likely to be late February to March - after Chinese New Year), an even higher gain could be captured.

*RASM CEA technically calculates this using revenue per available seat kilometer, but the idea still stands.

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AAA

AAF First Priority CLO Bond ETF

24.39

0.02
0.10%

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Position Return %
0.00
Position Return
25.14
Price When Posted

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27.65
Target Price
7/ 10
Confidence
2-6 Months
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