Zhongtong Finance app learned that China Merchants Securities released research reports stating that the aviation industry is in the recovery phase after the epidemic, especially the continuous recovery of international route demand. The global supply chain constraints affect the supply release slightly, while the risk of deteriorating conditions for oil prices and exchange rates is small. The industry's supply and demand are re-balancing, and the trend of profit recovery is clear. Short-term market risk preference is upward, economic policies continue to tighten, economic growth expectations rise, driving stock prices to rise rapidly; from a medium to long-term perspective, the sustained climb in industry profits will provide support for market cap recovery.

The main points of China Merchants Securities are as follows:

The aviation/airlines industry is currently in the bottom-up recovery phase. From 2020 to 2022, the industry was impacted by the epidemic, with the total losses of the entire aviation industry exceeding 300 billion yuan over the three years. In 2023, air travel began to recover, but the entire industry still recorded a loss of 5.9 billion yuan. In 2024, the industry saw strong demand for private travel, but weak business demand, relatively high oil prices, incomplete recovery of international flights, resulting in the industry's profit recovery falling short of expectations.

Looking ahead, the industry is expected to continue its upward recovery: on the supply side, the global aircraft supply chain is under pressure, suppressing supply growth; aircraft utilization rates have significantly increased, with relatively small growth space in 2025-26. On the demand side, as international flights resume, international travel normalizes, domestic demand grows, travel demand will continue to grow rapidly, and the industry's supply-demand relationship is expected to continue to improve, driving industry revenue and profitability recovery.

In the short term, in the fourth quarter, with the year-on-year low base effect, there is expected to be a narrowing of ticket price declines, and a significant reduction in losses year-on-year. The National Day holiday data has already preliminarily verified this trend. Civil aviation passenger traffic accumulated to 16.096 million person-times, averaging 2.299 million person-times per day, an 11.1% daily increase from the same period in 2023, and a 22% daily increase from the same period in 2019. HFlight domestic core ticket price decline narrowed to 12% (Q3 decline was 16%).

From a historical retrospective perspective, fundamental fluctuations determine stock price direction, with industry operation indicators (such as demand, ticket prices, load factor, supply, etc.) and profit performance being direct influencing factors. Changes on the supply and demand or profit side will be reflected in the stock price, as seen in the case of the three major airlines, where stock price fluctuations generally align with profit fluctuations.

The market environment has a significant impact on the valuation elasticity of aviation stocks, with stock prices benefiting from the upward elasticity of the market environment. The market environment determines the elasticity magnitude of aviation stocks. The aviation sector achieved significant excess returns during the bull markets of 2006-2007 and 2014-2015, especially in the late stages of the bull markets, such as the third quarter of 2007 and the second quarter of 2015. After profit growth is confirmed, stock prices further accelerate, with significant excess returns.

In terms of rhythm and altitude, the expected leading role determines the pace of market initiation, while the degree of profit realization and the market environment determine the altitude and length of the market. From a historical market perspective, strong expectations lead to stock price initiation ahead of fundamentals. During the process of profit realization, optimistic market sentiment boosts profit expectations and valuations, driving market cap continuously higher, reaching new highs. Compared to the peaks of the previous two market cycles in 2017-2018 and 2020-2023, the market cap recovery potential of the three major airlines remains significant.

Regarding targets: the current industry market cap is still at a historically low level. Recommended industry leaders include Air China Limited (601111.SH), China Southern Airlines (600029.SH), Juneyao Airlines (603885.SH) which combines profitability and valuation elasticity, and Spring Airlines (601021.SH) with stable operation and leading position in the low-cost market.

Risk Warning: Macroeconomic growth lower than expected; supply growth exceeds expectations; international route recovery falls short of expectations; significant increase in oil prices; significant depreciation of the Renminbi.