Pengyuan International Assigns ‘A-’ Rating to China Eastern Airlines Corporation Limited; Outlook Stable


27 Feb 2020

    HONG KONG, 27 February 2020. Pengyuan International has assigned a first-time global scale long-term issuer credit rating (LTICR) of ‘A-’ to China Eastern Airlines Corporation Limited (China Eastern). The outlook is stable.

    The Company’s issuer credit rating is based on a standalone credit profile (SACP) of ‘b+’ and our assessment that its parent China Eastern Air Holding Company (China Eastern Holding) has an extremely strong willingness to provide extraordinary support in the event of financial distress. China Eastern Holding is 100% held by the Chinese central government, making it a state-owned enterprise (SOE) and its credit profile is linked to the creditworthiness of China’s central government (AA/stable). China Eastern’s rating is based on the perspective of parent support. China Eastern’s rating is underpinned by its parent’s extremely strong willingness to support it and its leading market position in China’s airline industry. The rating is constrained by high financial leverage and unstable profitability in the short term due to impact of the COVID-19 outbreak.

    The rating outlook is stable, which reflects our expectation that China Eastern will maintain its strategic importance in China’s airline industry although the Company’s operating efficiency might be impacted negatively due to the outbreak of COVID-19 in early 2020.

    KEY RATING RATIONALES

    Credit Strengths

    Extremely strong ties with and continuous support from parent and central government. China Eastern is 56% owned by its parent company, China Eastern Holding, which is wholly owned the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), the Chinese government agency overseeing SOEs. The Communist Party of China (CPC) and central government appoints the chairman and general manager of its parent company. The chairman and general manager of its parent company also serve as chairman and general manager of China Eastern, strengthening supervision and collaboration between China Eastern and its parent. The Company has continuously received government subsidies amounting to RMB1.057 billion, RMB894 million and RMB674 million respectively in 2017, 2018 and the first half of 2019. Being one of the three main state-owned airlines in China, we believe SASAC will supervise China Eastern and its parent closely in order to maintain the safety and stability of China’s civil aviation industry.

    Strategic importance to China’s civil aviation industry. China Eastern has designated Shanghai and Beijing as its dual hubs, which indicates the Company’s strategic importance to the airline industry of China. Being a member of the SkyTeam alliance, China Eastern’s network has expanded to 175 countries and 1,150 destinations. China Eastern covers 80% of the top 100 cities and 54% of the domestic regions in China. We estimate China Eastern has increased its market share to 17.4% in 2019 from 16.9% in 2018 in terms of revenue tonne-kilometre (RTK) in China’s civil aviation sector. In the first half of 2019, we estimate that the Company accounted for 41%, 19%, 38% and 29% of market share in the airports of Shanghai, Beijing, Kunming and Xi'an respectively.

    Solid industry growth with policy support. Passenger traffic growth in China is expected to be substantially higher than global growth in the medium term, although China’s short-term passenger traffic growth in terms of revenue passenger kilometer (RPK) might be negatively impacted by the outbreak of COVID-19 in early 2020. We estimate China’s passenger traffic growth was 10% in 2019, higher than the global passenger growth of 4% that year. However, as several countries have implemented restrictions on flights from and/or to China, we estimate Chinese airlines’ passenger traffic might suffer negative growth in 2020 and recover to high single-digit growth in the medium term. Besides that, the State Council of the People's Republic of China announced that the nation’s civil aviation development fund will be halved from July 1, 2019. This policy relieves tax pressure and increases net profit of Chinese airlines.

    Credit Weaknesses

    Unstable profitability in the short term. Due to the outbreak of COVID-19, we believe passenger load factor (PLF) and passenger yield (revenue/RPK) are under high pressure in the short term, hence China Eastern’s profitability is expected to be unstable in the short term in 2020. We expect its revenue growth will decline around 13% to RMB112 billion in 2020 and its EBITDA margin will drop to 11% in 2020 from 27% in 2019. We expect its profitability would recover when the spread of coronavirus has been brought under proper control.

    Persistently high leverage. Given the capital-intensive nature of the airline industry, China Eastern has high financial leverage. We estimate its gross debt to capitalization ratio to be 74% as of the end of 2019. We estimate China Eastern’s debt to EBITDA ratio will jump to 17x in 2020 from 6x in 2019 before recovering to 8x in 2021. We expect the high leverage will be maintained in the next two years as capital financing would be the main source of funding for the supply of new aircraft.

    RATING OUTLOOK

    The rating outlook is stable, which reflects our expectation that China Eastern will maintain its strategic importance in China’s airline industry although the Company’s operating efficiency might be impacted negatively due to the outbreak of COVID-19 in early 2020.

    We would consider downgrading China Eastern’s issuer credit rating if the following scenario occurs 1) significant deterioration of the credit profile of its parent China Eastern Holding on a prolonged basis; 2) Our assessment on central government’s willingness to support China Eastern Holding is weakened; 3) Our assessment on China Eastern Holding’s willingness to support China Eastern is declined.

    We would consider upgrading the Company’s issuer credit rating if its credit profile improves substantially, which could be caused by 1) substantial improvement of the credit profile of China Eastern Holding on a sustained basis; 2) Our assessment on central government’s willingness to support China Eastern Holding is strengthened.

    Note: ratings mentioned in this press release are unsolicited ratings.

    ANALYSTS CONTACT

    Primary Analyst

    Simon Lee, CFA

    +852 3615 8307

    simon.lee@pyrating.com

    Secondary Analyst

    Brian Lam
    +852 3615 8339

    brian.lam@pyrating.com

    Committee Chair

    Tony Tang

    +852 3615 8278

    tony.tang@pyrating.com

    MEDIA CONTACT

    media@pyrating.com

    OTHER ENQUIRIES

    contact@pyrating.com

    Date of Relevant Rating Committee: 12 February 2020

    Additional information is available on www.pyrating.com

    Related Criteria

    General Corporate Rating Criteria (15 March 2018)

    Corporate Financial Adjustments and Ratio Definitions (7 May 2018)

    Government-Related Entities Rating Criteria (31 August 2018)

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