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


04 Mar 2021

    HONG KONG, 4 March 2021. Pengyuan International has affirmed the global scale long-term issuer credit rating (LTICR) of ‘A-’ to China Eastern Airlines Corporation Limited (CEA). 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 (CEH) has almost certain willingness to provide extraordinary support in the event of financial distress. CEH is majority-owned 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). CEAs rating is based on the perspective of parent support, and is underpinned by its parent CEH’s almost certain willingness to support it and its leading market position in China’s airline industry. The rating is constrained by CEA’s high financial leverage and unstable profitability in the near term due to impact of the coronavirus pandemic outbreak.

    The rating outlook is stable, which reflects our expectation that CEA will maintain its strategic importance in China’s airline industry although the Company’s operating efficiency has been impacted negatively due to the outbreak of coronavirus pandemic.

    KEY RATING RATIONALES

    Credit Strengths

    Extremely strong ties and support from the parent company and the government. CEA is 50% owned by its parent CEH, which is majority-owned by State-owned Assets Supervision and Administration Commission of the State Council (SASAC). SASAC appointed the Chairman and General Manager for CEH, and they also serve as the Chairman and General Manager of CEA, thus strengthening the supervision and collaboration between CEH and CEA. As a sign of government support, CEA received government subsidies of various types amounted to RMB5.4 billion, RMB6.3 billion and RMB2.1 billion, respectively, in 2018, 2019 and the first half of 2020. In addition, CEA also announced in February 2021 that CEH plans to inject RMB10.8 billion of capital into CEA via a private placement. Being one of the three main state-owned airlines in China, we believe that SASAC will strongly support CEH and CEA in order to maintain the safety and stability of the China civil aviation industry.

    Strategical importance to the China civil aviation industry. Having Shanghai, Beijing, Xi’an and Kunming as major hubs, CEA has the strategic importance as one of the three major airlines in China. The Company had 17% share of the country’s domestic air passenger traffic and 23% of international traffic (based on revenue passenger kilometre (RPK)) in 2019, before the aviation industry is hit by the coronavirus pandemic. According to CEA, it achieved market share of 41%, 18%, 29% and 37% in Shanghai, Beijing, Xi’an and Kunming, respectively, in 2019. Besides, the Company operates a number of China’s most profitable domestic passenger flight routes such as Beijing-Shanghai with consistently strong demand. From a global perspective, CEA is a member of SkyTeam alliance and its network covers 1,150 destinations in 175 countries, making the airline one of the top ten largest in the world based on RPK.

    Solid industry growth with policy support. Since air passenger traffic growth has positive correlation with macroeconomic growth, we believe that air passenger traffic growth in China will continue to outpace the global average in the medium to long run. Even though the country’s RPK declined by more than 40% in 2020 due to the pandemic-led traffic restrictions, the decline rate was below global norm since China had in general resumed normal domestic travel activities since the middle of the year. Besides, the State Council lowered the Civil Aviation Development Fund rate by half in July 2019, and temporarily waivered the fund collection in 2020 as a means to support airlines’ financials. As such, we believe that policy outlook will remain favourable for Chinese airlines.

    Credit Weaknesses

    Inevitable cash earnings volatility. Airlines’ earnings have been volatile. To elaborate, fuel cost accounts for about 30-40% of an airline’s total operating cost depending on the jet fuel price level. Meanwhile, Chinese airlines either do not hedge against fuel price fluctuation or hold limited hedging position given regulatory restrictions, thus leading to cash earnings volatility. Apart from that, the coronavirus pandemic has significantly impacted airlines’ profitability due to fallen traffic demand and a drop in aircraft utilisation. We estimate that CEA recorded 79% EBITDA plunge in 2020 on 49% revenue decline, although we expect its EBITDA to rebound and the margin to recover in 2021 amid traffic recovery. Lastly, one other thing to note is that while CEA, like other Chinese airlines, reports substantial foreign exchange gain/loss at times, it is predominantly mark-to-market foreign exchange impact due to valuation change in foreign-currency-denominated debt, thus having limited cash flow impact.

    High financial leverage. Given the capital-intensive nature of the airline industry, CEA has high financial leverage. We estimate that the gross debt to capitalisation ratio was at 74% as of the end of 2020, and expect the high leverage to stay, as debt financing will remain as the major source of aircraft acquisition funding.

    RATING OUTLOOK

    The rating outlook is stable, which reflects our expectation that CEA will remain as one of the leading Chinese airlines. Although the Company’s business has been heavily impacted by the coronavirus pandemic, we think that the impact is temporary and that CEA will return to normal traffic growth trajectory and aircraft utilisation by the end of 2022.

    We would consider downgrading CEA’s issuer credit rating if 1) there is significant credit profile deterioration of its parent CEH on a prolonged basis; 2) ties between CEA and CEH are weakened substantially; and 3) there is substantial deterioration in the Company’s credit profile, caused by issues such as prolonged demand weakness and liquidity crunch.

    We would consider upgrading CEA’s issuer credit rating if 1) there is substantial credit profile improvement of CEH on a sustained basis; and 2) there is substantial improvement of the CEA’s credit profile such as lower leverage on a prolonged basis.

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


    ANALYSTS CONTACT

    Primary Analyst
    Vincent Ha, CFA
    +852 3615 8307
    vincent.ha@pyrating.com

    Secondary Analyst
    Winnie Guo
    +852 3615 8344
    winnie.guo@pyrating.com

    Committee Chair
    Ke Chen, PhD
    +852 3615 8316
    ke.chen@pyrating.com

    MEDIA ENQUIRIES
    Charley Lui
    +852 3615 8296
    charley.lui@pyrating.com

    RATING SERVICES ENQUIRIES
    Allen Wei
    +852 3615 8324
    allen.wei@pyrating.com


    Date of Relevant Rating Committee: 23 February 2021

    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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