by winston » Thu Jun 17, 2021 10:23 am
GLOBAL AVIATION SECTOR – RESTARTING TRAVEL
As highlighted in our earlier report, Aviation – 2021: A year of recovery (published on 14 Jan 2021), we have turned more positive on the aviation sector and expect a gradual recovery in 2021, particularly strong in 2H21, supported by progressive reopening of borders and vaccination programmes.
We believe that
(i) the recovery in 2021 will be led by leisure travel due to strong pent-up demand, but remain cautious on business travel which is likely to take another 12-16 months to recover;
(ii) domestic travel will lead the recovery while international travel will take a longer time to recover due to headwinds from border controls and travel restrictions;
(iv) vaccines and easing travel restrictions are likely the key drivers to resume international travel.
Given the fast rollout of vaccination in the US and extension of pandemic relief bill, domestic travel demand in the US continued to strengthen and is expected to recover to its pre-pandemic levels by end of 2021 or early 2022 based on IATA’s forecasts.
This is likely to benefit airlines with higher domestic travel exposure such as Southwest Airlines [LUV US; HOLD; FV: USD66] and Delta Air Lines [DAL US; HOLD; FV: USD55].
While both are HOLD-rated, there is still upside potential of 16% and 21%, respectively. As vaccination rates pick up and borders reopen gradually, Delta is also poised to benefit from the resumption of international travel.
Within Asia, China remains the bright spot which is one of the few countries where domestic RPKs have jumped above the pre-pandemic levels, benefitting from a shift in preference from international to domestic travel.
We believe that China will continue to lead the recovery in 2021 given China’s large domestic market and swift vaccination program. As the focus shifts to the timing and robustness of the recovery in international travel, Air China [753 HK; HOLD; FV: HKD6.50] (~7% upside) will benefit the most from the recovery since it has the largest exposure to international market among the “Big three” Chinese airlines and owns a 30% stake in Cathay Pacific Airways.
We like SATS [SATS SP; BUY; FV: SGD4.84] which is a beneficiary of vaccine shipments as a Certified pharma handler, strong cargo demand, a gradual recovery of travel demand ahead and its non-aviation business (44% of FY21 revenue) across Asia could provide some buffer to the loss of income from its aviation business.
Sustained recovery in domestic travel
International travel will be the next phase of recovery as vaccination momentum picks up
Strong pent-up demand for travel
Source: OCBC
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