HONG KONG, 23 February 2023. CSPI Ratings has affirmed China Eastern Airlines Corporation Limited’s (CEA) global scale long-term issuer credit rating (LTICR) at ‘A-’. 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). CEA’s 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 the impact of the coronavirus pandemic.

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 the coronavirus pandemic.

KEY RATING RATIONALES

Credit Strengths

Almost certain support from the parent company. CEA is 53% 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, who 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 amounting to RMB5.3 billion, RMB4.9 billion and RMB1.7 billion, respectively, in 2020, 2021 and the first half of 2022. In addition, CEA also received RMB15.0 billion capital from CEH and other investors via a private placement in January 2023. 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.

Strategic importance to the China civil aviation industry. With Shanghai, Beijing, Xi’an and Kunming as major hubs, CEA has strategic importance as one of the three major airlines in China. The Company had 16% share of the country’s domestic air passenger traffic and 19% of international traffic based on revenue passenger kilometre (RPK) in 2022 amid the coronavirus pandemic. According to CEA, it achieved market shares of 41%, 18%, 29% and 37% in Shanghai, Beijing, Xi’an and Kunming, respectively, in 2019 before the pandemic impact. 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 the SkyTeam alliance and its network covers 1,036 destinations in 170 countries, making the airline one of the top 10 largest in the world based on RPK.

Solid industry growth with policy support. Since air passenger traffic growth has a 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 40% again in 2022 due to coronavirus pandemic-led traffic restrictions, we think that passenger traffic demand will fully recover with the eventual resumption of both domestic and international passenger traffic. Besides, China’s Ministry of Finance provided extra subsidies to Chinese Airlines between 21 May and 20 July 2022 when their fleet was under-utilised, along with other supports such as emergency loans. As such, we believe that the policy outlook will remain favourable for Chinese airlines.

Credit Weaknesses

Inevitable cash earnings volatility. Airlines’ earnings have been volatile. To elaborate, fuel costs account for about 30-40% of an airline’s total operating costs depending on the jet fuel price level. Meanwhile, Chinese airlines either do not hedge against fuel price fluctuation or hold limited hedging positions 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 negative EBITDA of RMB12.4 billion in 2022 amid 35% year-on-year revenue decline, although we expect its EBITDA to rebound and the margin to recover in 2023 and onward 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 changes 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 94% as of the end of 2022, 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 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 its normal traffic growth trajectory and aircraft utilisation by the end of 2024.

We would consider downgrading CEA’s issuer credit rating if 1) there is significant credit profile deterioration of CEH on a prolonged basis; 2) ties between CEA and CEH are weakened substantially; and/or 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/or 2) there is substantial improvement of CEA’s credit profile such as lower leverage on a prolonged basis.

Note: ratings mentioned in this press release are unsolicited.

Date of Relevant Rating Committee: 20 February 2023

Additional information is available on www.cspi-ratings.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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