China Eastern Airlines: A Pandemic Yo-Yo (NYSE:CEA)

Growing demand in Chinese air travel provides one of the biggest long-term drivers for demand for commercial aircraft. With growing demand for air travel, one would expect that Chinese airlines provide for a solid investment opportunity in the same way upbeat expectations from US airlines provided a nice short-term opportunity. For a long time, China was leading the air travel recovery as the Chinese government responded extremely fast to rising and decline in COVID-19 infections.

However, what we are also seeing is that with rapid lockdowns and re-openings companies are hit hard, and it’s harder to get to a level of group immunity that partially eliminates the need for strict lockdowns. China Eastern Airlines (NYSE:CEA) definitely show the financial impact of the Chinese policy on pandemics, as I discuss in this report.

Background on China Eastern Airlines

For those not familiar with China Eastern Airlines, a short introduction might be helpful. China Eastern Airlines is one of the Big Three Airlines in China next to Air China and China Southern Airlines with a fleet of 600, though rather than being one airline on group level there are five airlines with a fleet of 768 aircraft of which China Eastern Airlines is by far the biggest.

Significant financial pressures

China Eastern Airlines’ results showed a very challenging environment. While we see many airlines in the west doubling their revenues year-over-year, the dynamics are materially different in China. China Eastern Airlines saw its revenues decline by 5.5% year-over-year to 12.7 billion RMB. Unfortunately, China Eastern Airlines’ earnings results lack detailed comments on what is causing increases or decreases in revenue and costs. It is clear that the lockdown of Shanghai, where the airline has its hub, by the end of March 2022 has played a role in the revenue decline.

On costs side, a surge in fuel costs due to the situation in Ukraine brought extra pressure resulting in a 7% increase in costs and a 7.8 billion RMB loss to shareholders marking a 4 billion RMB increase in losses. What we’re seeing at China Eastern Airlines is rather concerning as we basically are seeing that while airlines in China were ahead in the recovery to pre-pandemic levels, the results are deteriorating instead of improving on revenues that are just 5.5% lower year-over-year.

A unique set of pressures

During the quarter, ticket sales declined, which is not solely driven by COVID-19. In March 2022, a Boeing 737-800 crashed which I discussed in a separate report. Crashes often result in increased fears and hesitance to fly with a small part of the flying public and so it’s likely that the crash with the China Eastern Airlines aircraft did adversely impact the company’s ticket sales and in-quarter revenues as well as cash flow. Final conclusions from the jet have not been drawn, but it looks like crew handling will be investigated in detail as there were no indications of any failure connected to the aircraft itself.

The other part of the pressure is potentially more harming for China Eastern Airlines outside of the quarter. By the end of the quarter, Shanghai was put into a strict lockdown again that lasted two months, and it’s those kinds of micro-lockdowns that have major impacts. Shanghai has 26.3 million citizens, so while the term micro-lockdowns sounds benign it most certainly is not, and that is what’s going to put significant pressure on results in the second quarter in combination with high jet fuel prices.

I also believe that as long as fast lockdowns and re-openings as well as testing are going to be part of the zero-COVID policy, the impact on airlines and other business is going to be significant in China and also delays a consistent re-opening of society and instead promotes an oscillatory motion of lockdowns and re-openings.

Conclusion

For a long time, Chinese airlines including China Eastern Airlines were ahead in the recovery race compared to international peers. However, due to the zero-COVID policy that the Chinese government has adopted we also see more rapid closings and re-openings which are not boding well for business and in particular Chinese airlines. For China Eastern Airlines, the lockdown in its hub and the crash with one of its aircraft make matters worse. As a result, I don’t consider China Eastern Airlines an attractive airline name to hold.