China Southern Airlines announced 2024H1 results: The company achieved operating income of 84.79 billion yuan, an increase of 18.04% over the previous year, and achieved a net loss of 1.228 billion yuan to mother, and a loss of 2.875 billion yuan in the same period last year.

Q2 losses increased year over year. In the first half of the year, the company achieved operating income of 84.79 billion yuan, a year-on-year increase of 18.04%, and achieved a net loss of 1.228 billion yuan to mother and 2.875 billion yuan in the same period last year; of these, Q2 Company's revenue was 40.189 billion yuan, up 6.39% year on year, and a net loss to mother was 1.984 billion yuan. The net loss for the same period last year increased by 0.977 billion yuan, and the loss increased. By business segment, the company's passenger transportation and related service revenue in the first half of the year was 73.384 billion yuan, up 17.64% year on year; freight revenue was 8.73 billion yuan, up 21.59% year on year; other revenue was 2.676 billion yuan, up 17.94% year on year. In addition, the company recorded an investment loss of 1 billion yuan in the first half of the year, including 1.385 billion yuan confirmed to increase capital to Sichuan Airlines; in the first half of the year, the company recorded non-operating income of 2.1 billion yuan, including aircraft operation compensation and government subsidies.

Passenger occupancy rates continued to recover year on year, and unit costs declined. In terms of operating data, the first half of 2024:1) the company's ASK/RPK increased by 7 percentage points to 83.1% year over year; 2) domestic ASK/RPK increased by 7 percentage points year on year to 83.1% year on year; 2) domestic ASK/RPK increased 8 percentage points year on year to 83.6% year on year; 3) international ASK/RPK increased by 5 percentage points year on year to 81.7% year on year. Benefiting from improved operating efficiency, the company's unit ASK cost decreased by 4% year on year in the first half of the year, and the cost per unit of oil withholding decreased by 6% year on year.

Passenger kilometer revenue declined significantly year over year. In the first half of the year, the company's passenger kilometer revenue was -13% to 0.49 yuan, with China internal flights -7% year-on-year and -29% year-on-year for international flights. We believe that the year-on-year decline in domestic passenger traffic is mainly due to: 1) in 2023, as the first year of travel recovery, passenger demand was concentrated, and supply and demand were in the process of recovering. Supply and demand jointly drove up ticket prices, forming a high base for this year; 2) the aviation market had a sharp low season in the first half of this year, and the off-season was affected by factors such as weak business travel, which dragged down fare performance. The decline in international ticket prices is due to the steady restoration of international flights, driving international fares back to normal levels.

Operating at the North and South hubs, it is expected to benefit from a broad market space in the long term. Considering the weak level of domestic ticket prices this year, we expect the company's net profit to be 2.5/4.7/6.3 billion yuan in 2024-26, respectively, downgrading the company's rating to “increase holdings.” In the long run, we believe that the company's north-south base layout and a relatively complete national second- and third-tier network are expected to enable the company to benefit from long-term growth in aviation demand and the expansion of main base airports.

Risk warning: macroeconomic downside risk; demand falling short of expectations; sharp rise in oil prices; sharp depreciation of RMB.