Incident: In the first half of '24, the company achieved revenue of 79.52 billion yuan, a year-on-year increase of 33.39%, a net loss of 2.782 billion yuan to mother, a loss of 3.451 billion yuan in the same period last year; net loss of 3.44 billion yuan after deducting net loss to mother, a loss of 4.938 billion yuan for the same period last year. On a quarterly basis, the company's net losses after deduction for the first quarter and second quarter were 1.713 billion yuan and 1,727 billion yuan, respectively.

Volume and price increases and oil prices continued to cause losses in the first half of the year: in the first half of the year, the company's passenger revenue totaled 73.137 billion yuan, up 31.85% year on year, passenger capacity investment increased 33.38% year on year, and passenger occupancy rate increased 8.77pct to 79.29% year on year, but passenger kilometer revenue fell 12.08% to 0.537 yuan.

On domestic routes, the company's capacity investment increased 10.04% year on year, passenger occupancy rate increased 8.74 pct year on year, passenger kilometer revenue decreased 6.78% year on year to 0.548 yuan; on international routes, capacity investment increased by 210.41% year on year, passenger occupancy rate increased 15.35 pct year on year, and passenger kilometer revenue decreased 36.61% year on year to 0.493 yuan year on year. As can be seen, both domestic and international routes are showing a state of volume increase and price reduction. Due to a sharp increase in capacity investment, passenger kilometer revenue has also declined quite a bit on international routes.

In terms of costs, the company's operating costs in the first half of the year were 77.47 billion yuan, an increase of 30.84% over the previous year. The cost of withholding fuel per unit ASK in the first half of the year was 0.293 yuan, a year-on-year decrease of 5.3%, but the fuel cost per unit ASK was 0.158 yuan, an increase of 5.2% over the previous year, mainly due to an increase in fuel prices. The average daily utilization rate of the company's aircraft increased by 1.04 hours to 8.79 hours, so the depreciation cost of the company's unit ASK decreased by 18.0%; the take-off and landing cost of the company unit ASK increased by 12.6%. We think it is mainly due to an increase in the share of capacity invested in international routes, while the rate related to take-off and landing of international routes is higher than that of domestic routes.

Due to the increase in fuel costs and the decline in passenger kilometer revenue, the company's profit level was slightly lower than expected. Although the gross margin of the passenger transport business increased 2.03 pct to 1.65% compared to the same period last year, it is still at a low level. Therefore, although the company reduced losses in the first half of the year, it was still unprofitable.

The aircraft introduction plan is concentrated in the second half of the year, and supply-side pressure still needs to be digested: in the first half of the year, a total of 16 aircraft were introduced and 6 were withdrawn, with a net increase of only 10. According to the company's 24-year aircraft introduction and exit plan, the annual plan is to introduce 48 aircraft and withdraw 14 aircraft, with a net increase of 34 aircraft. Therefore, the company's net increase in aircraft this year is mainly concentrated in the second half of the year. Due to weak aviation demand due to declining economic growth, compounded by an increase in fleet size, the company still has excessive pressure on the supply side in the short term, and needs to continue to digest it in line with the recovery of international routes.

Profit forecast and investment advice: Taking into account the volume and fuel prices of the industry this year, we lowered the company's net profit from 2024-2026 to -13.9, 32.8, and 7.92 billion yuan, corresponding to EPS of -0.09, 0.20, and 0.49 yuan, respectively. In view of the continuous improvement of the industry and company fundamentals, and the fact that Air China accounts for the highest share of international routes among the three major airlines and has greater profit flexibility in the process of industry recovery, we maintain the “Recommended” rating.

Risk warning: demand in the civil aviation industry falls short of expectations; changes in civil aviation policy; large fluctuations in oil prices and exchange rates, etc.