中国国航(601111)

Air China hosted a 1H17 post-results conference call on 31 August. Keytakeaways are as follows:

- 1H17 review and FY17 outlook: In 1H17, Air China saw an increase in bothload factors and yield, thanks to improved demand/supply situation in thedomestic market on a strong economy. Front cabin load factor improved by9% for domestic routes and 8% for international routes to around 60% forboth. And revenue from front cabin increased 15% YoY. According tomanagement, there is still room to further increase front cabin load factor byoptimizing fleet and improving services.

-Ticket pricing: Air China’s strategy to increase ticket prices has beensuccessfully implemented. In 1H17, passenger yield increased by 1.4% andcargo yield surged 12.7% by reducing the ratio of cargo space available forpre-sale. Going forward, Air China will stick to the strategy of raising ticketprices for the rest of the year.

- Fuel cost: Air China’s net profit declined 60% in 1H17 mainly due to a highYoY increase in fuel price. Management still has no fuel hedging plans for thisyear.

- Capacity: In 1H17, Air China's 5% ASK growth was lower than planned dueto the maintenance of the central runway and traffic disruption during the OneBelt and One Road Forum. In 2H17, Air China plans to expand ASK by 11%,with domestic ASK likely to increase by 9-10% and international ASK toincrease by 12%.

- Investment loss: Management confirmed that the investment loss in 1H17was mainly attributable to losses at Cathay Pacific (0293.HK, HKD11.62, Sell).Air China remains hopeful of a near-term turnaround in Cathay Pacificoperations.

- Strategic JV with Lufthansa (LHAG.DE, EUR20.34, Hold): The cooperationstarted in April is operating smoothly. The two parties are improving services(e.g. sharing VIP lounges); offering more transit flights and providing a morediversified range of products (e.g. increased products from 3 cabins to 5cabins).

- USD debt: Air China further reduced its USD debt ratio to 44% at the end ofJune 2017 from 46% at the end of 2016 by replacing USD debt with RMB debtand repaying USD debt in advance. The airline will stick to its original plan tofurther reduce the ratio to c.35% by year-end FY17 in order to control FX risk.Yet, given a steady interest rate for USD debt at the moment, the airline willstrive to dynamically maintain an optimal balance of foreign debt ratio.