20140407-高盛-Assessing_the_impact_of_ancillaries_on_Chinese_carriers_11页_297kb

Summary: China Transportation - Airlines: Impact of Ancillaries

Core Content

This report evaluates the potential impact of ancillary fees on the profitability of Chinese airlines, comparing them with global and regional peers. It outlines three scenarios for the introduction of ancillaries and their potential revenue and profit contributions. The report also provides stock ratings and highlights the current state of ancillary income for major carriers.

Key Findings

• Ancillary Revenue Potential: Chinese airlines significantly lag behind global peers in ancillary revenue. The top 3 Chinese carriers generate less than any US carrier or carrier within the top 10 in terms of ancillary income.
• Revenue Boost Estimate: If Chinese carriers could match US peers in per passenger ancillary charges, they could unlock an additional Rmb4.3 bn in revenue, potentially contributing up to 38% of 2014 net profit.
• Profitability Impact: Ancillary fees could help improve profitability, especially if they are introduced alongside yield recovery and high load factors. However, structurally higher returns may not be expected in the short term due to the time required to expand into higher margin businesses such as in-flight retailing.
• Scenario Analysis:
  • Scenario 1: Full implementation of ancillaries over 5 years, leading to a 38% increase in 2014E net profit.
  • Scenario 2: Slower ramp-up over 8 years, resulting in a 19% increase in 2014E net profit.
  • Scenario 3: Limited implementation on routes priced at or above the fare ceiling, leading to a 1.9% increase in 2014E net profit.
• Ancillary Income Composition: US carriers generate a significant portion of their revenue from ancillaries, with US full service carriers (FSCs) leading the global average. In-flight retailing and other ancillary services offer higher margins compared to traditional ticket sales.
• Current Ancillary Income: In 2012, Chinese airlines generated only Rmb602 mn in ancillary income, which is just 2.2% of total revenue, compared to 69% for global peers.
• Market Conditions: The introduction of ancillary fees is influenced by macroeconomic factors and passenger behavior. Chinese carriers may take longer to fully realize the benefits of ancillaries due to the need for industry consolidation and service unbundling.

Stock Ratings

• China Eastern Airlines (CEA) is highlighted as a key beneficiary of ancillary fee introduction due to its high exposure to domestic routes with higher fares.
• China Southern Airlines (CSA) and CEA are rated as Buy, while Air China (AC) is rated as Neutral.

Investment Considerations

• Risks: Sustained Rmb depreciation and slower-than-expected yield recovery could negatively impact returns.
• Upside Potential: Stronger-than-expected yield recovery and successful unbundling of services could lead to meaningful revenue growth.
• Growth and Returns: The report suggests that ancillaries may contribute to growth but not necessarily to structural margin improvement in the near term.
• Valuation Metrics: CEA is considered attractively valued at 0.70x 2014 EV/GCI or 0.9x P/B, against forward CROCI and ROE of 9.7% and 14%, respectively.

Additional Insights

• Ancillary Income Sources: Chinese airlines currently derive most of their ancillary income from commission-based products, with limited use of a la carte features such as excess baggage charges or priority check-in.
• Regulatory Context: The report references regulatory data on fare ceilings and the proportion of domestic routes priced at or above these ceilings.
• Global Comparison: US carriers generate higher ancillary income per passenger than both global and Asian (excluding China) peers, indicating a significant opportunity for Chinese airlines to increase revenue.

Conclusion

The introduction of ancillary fees has the potential to significantly boost revenue and profitability for Chinese airlines, particularly in the domestic market. However, the full realization of this potential may take several years, and the impact on returns may be gradual. The report suggests that while ancillaries can provide a tailwind, structural improvements in margins are not expected in the short term. Investors are advised to consider the report in conjunction with other factors, including macroeconomic conditions and currency fluctuations.