OCBC Research Group is turning more positive on the aviation sector and is expecting to see a gradual recovery this year, particularly in 2H2021. This comes on the back of positive progress on vaccine developments and distributions.

In its market pulse report dated Jan 15, analyst Chu Peng says, “We believe that the recovery will be led by leisure travel due to strong pent-up demand, but remain cautious on business travel; domestic travel will lead the recovery while international travel will take a longer time to recover due to headwinds from border controls and travel restrictions.”

Looking back, Chu notes that 2020 was a year of turbulence for the aviation sector, and one of the worst ever in airline history. The airline sector is estimated to lose some US$510 billion ($678.14 billion) of revenue to just US$328 billion in 2020, representing a 61% y-o-y drop. Despite massive cost reductions and support by governments worldwide, over 40 airlines had to completely cease or suspend operations in 2020.


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The resurgence of Covid-19 in several countries stalled air travel recovery in 4Q2020, as border controls and lockdowns were implemented. International passenger traffic remained close to record low in Nov 2020, with a decline of 88.3% y-o-y in Revenue Passenger Kilometres (RPKs), compared to an 87.7% y-o-y drop in Oct 2020. But countries that saw improvements in the Covid-19 spread, saw an improvement in domestic travels, such as China and Russia. Domestic RPKs in China were only marginally down as compared to 2019 levels (4.8% lower y-o-y in Nov and 1.4% lower y-o-y in Oct 2020). However, recovery in other regions remained subdued due to high infection cases.

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Despite capacity constraints, cargo outperformed passenger business in 2020. Cargo revenue is estimated to grow 15% y-o-y to US$117.7 billion in 2020 while capacity will fall 45% due to loss of available belly cargo space.

“Cargo revenue is making up a greater portion of airline revenues which is estimated to increase from 12% in 2019 to 36% in 2020. While the resilient performance of cargo could provide some buffer to airlines’ income losses, it is unable to compensate for the fall in passenger revenue,” says Chu.

Nonetheless, Chu may expect a better 2021 on the assumption of successful vaccines roll-out and less strict travel restrictions, but near-term challenges remain, and a full recovery may only happen in 2024.

Having said that, industry losses are expected to continue into 2021 with a net loss of US$38.7 billion. Despite some improvement in major passenger operating statistics in 2021, performance would still lag behind 2019 levels.

“We expect air cargo to benefit from the recovery of global economy, e-commerce and shipment of vaccines in 2021,” adds Chu, as she forecasts cargo revenue to increase by 19% y-o-y to US$139.8 billion, at its historical high levels.


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“Cargo volumes are projected to recover back to the levels in 2019 and grow 13% y-o-y to 61.2 million tonnes in 2021. In addition, we expect yield to further improve given continued capacity crunch as it needs time for passenger travel to restart and to restore belly capacity,” she adds.

On that note, Chu expects China to lead the recovery in 2021, given its large domestic market and its vaccination programme which is underway and aims to inoculate 50 million people before Lunar New Year.

“We remain constructive on Chinese airlines which could potentially benefit from the early recovery in China, although we are cognisant of the risks of new waves of Covid-19 cases,” says Chu, who has a “hold” recommendation on Air China with a fair value estimate of HK$6.50.

Meanwhile in Singapore, the analyst believes that the city state is poised to benefit from border reopening as a regional transit hub. “Given the positive developments on vaccines, SIA is prepared for a measured expansion of network and expects passenger capacity to reach 25% of pre-Covid-19 and resumed 45% of its network by Mar 2021. While we expect domestic travel to recover first, followed by regional, and international travel, SIA is poised to benefit from Singapore’s progressive re-opening and the roll-out of vaccines in 2021, in our view,” she adds.

Chu has a “sell” call on SIA with a fair value estimate of $3.70.

As at 12.02pm, shares in SIA are trading at $4.28, slightly recovering from its all-time low of $3.20.