Sealand: Air passenger transport is expected to stabilize and recover, and industry profitability may welcome improvement.

Sealand has released a research report stating that the aviation industry is a strongly cyclical and capital-intensive sector, where supply and demand dictate revenue changes, and factors such as oil prices and exchange rates affect cost expenses. The fluctuations in supply, demand, and costs together impact airline performance. Current pessimistic expectations have somewhat diminished, and airline stock prices have pulled back to relatively low levels compared to after the pandemic. Supply is expected to grow slowly while demand is likely to improve, warranting attention to the subsequent recovery of industry ticket prices and the growth of travel volume, which may lead to improved industry profitability. Sealand's main points are as follows: What is the current trend in the supply of air passenger and cargo transport? Limited supply expected over the next three years On the supply side, by 2025, fleet utilization is expected to return to levels seen in 2019, but the delivery of new fleets has been delayed, resulting in a slowdown in industry capacity growth. In terms of utilization, the average fleet utilization rate in 2025 is expected to be just 0.05 hours lower than in the same period of 2019, remaining basically flat. Regarding fleet introductions, five airlines plan a net growth rate of +2.7% in their fleets by 2026, with a cumulative net growth rate of only 0.7% in the first half of the year, indicating a still sluggish growth pace. The report predicts that the speed of new aircraft deliveries will be delayed, falling below planned growth rates, and future capacity introductions are expected to maintain low growth rates. According to delivery situations from Boeing and Airbus, while Airbus has returned to a normal delivery pace, Boeing's delivery capacity has not fully recovered, which may lead to delays in deliveries of both passenger and cargo aircraft. What is the demand outlook for air cargo and passenger transport? Cargo demand is growing, while passenger transport shows resilience 1) Air cargo demand: Overall robust growth, with international routes as the core growth engine. In the first half of 2026, domestic and international cargo turnover volumes saw a year-on-year change of -0.3% and +16.5%, respectively. The growth rate for international routes far exceeds that of domestic routes, making the international market a key driver for growth. Structurally, according to disclosures from the International Air Transport Association (IATA), by 2025, over two-thirds of the trade value related to AI will be carried by air cargo. In terms of quantity, AI-related goods account for only 7% of the total air cargo volume, but their value represents 53.5% of the total trade value in air transport, demonstrating a characteristic of "small volume, high value." Transportation of AI hardware is expected to become a significant driver for the growth of air cargo demand in the future. 2) Air passenger demand: Travel demand remains resilient and is expected to maintain steady growth in the future. In the first half of 2026, passenger numbers and turnover volume increased by 1.0% and 4.3% year-on-year, respectively. Although there was a decline in travel demand from May to June, overall passenger flow still saw consistent growth in the first half of the year. In terms of load factor, the industrys average load factor in the first half of 2026 is expected to reach 85.7%, up 1.6 percentage points year-on-year. With the decline in the oil price base and the approach of the peak travel season, civil aviation travel volumes and load factors are expected to rebound, maintaining steady year-on-year growth. Looking back, from 2024 to the present, the year-on-year growth rate of monthly civil aviation passenger numbers has mostly exceeded that of monthly retail sales, indicating a certain resilience in travel demand relative to overall consumption. From an annual data perspective, the year-on-year growth rate of total civil aviation turnover has consistently maintained a ratio of 1.5 to 2 times the annual GDP growth rate, with civil aviation transportation growth continually outperforming the macroeconomic landscape. Looking ahead, civil aviation travel demand is expected to retain strong resilience, possibly sustaining steady growth. What is the current level of oil prices and exchange rates? Pessimistic sentiment has somewhat diminished At present, oil prices have fluctuated downward from their highs, and pessimistic expectations have abated, creating an opportunity for sector profitability to improve. Since the beginning of the year, due to geopolitical conflicts in the Middle East, international oil prices significantly surged, leading to a sharp increase in airline fuel costs; in addition, supply-demand pressure in the short term has resulted in a deep correction in the stock prices of listed airlines. As the geopolitical situation has eased since mid-June, international crude oil prices have sharply decreased from their peaks in April and May, with jet fuel prices also declining, easing cost pressures on airlines. On the exchange rate front, the Chinese yuan has continued its appreciation trend, with airlines likely to benefit from foreign exchange gains. The report notes that at this time, market pessimism regarding the impact of oil prices has lessened, and airline stock prices have adjusted to relatively low levels after the pandemic. Although high oil prices in the short term exert significant pressure on airline immediate performances, the mid to long-term logic of improving supply and demand in the industry remains intact; with the oil price base moving down quarter-on-quarter in the first half of the year and peak season demand rebounding, industry profitability is poised for improvement, potentially signaling the start of a sector recovery. How should aviation investments be allocated? Optimistic about the upward trend in cargo demand, while monitoring the profitability elasticity of passenger transport The aviation sector is currently in a phase of diminished pessimism and marginal improvement. 1) On the cargo side: It is recommended to consider Eastern Air Logistics, which is experiencing an increase in demand. The industrys outlook is improving, and the company has strong performance delivery capabilities, along with a dividend payout ratio expected to remain high, offering some dividend investment value. 2) On the passenger side: The long-term logic of supply-demand improvement remains, which invites interest in opportunities for low-positioning in the sector. Current pessimistic expectations have somewhat diminished, and airline stock prices have been pulled back to relatively low levels after the pandemic, while supply is expected to grow slowly and demand is likely to improve. Attention should be paid to the future recovery of industry ticket prices and growth in travel volume, which could lead to improved industry profitability. Key focus should be on Air China Limited, China Eastern Airlines Corporation, Spring Airlines, China Southern Airlines, and Juneyao Airlines, among others. Risk Warning Geopolitical risks, macroeconomic volatility risks, lower-than-expected growth in travel demand, risks of supply exceeding expectations, increases in ticket prices lower than anticipated, intensified market competition risks, risks of high-speed rail competition, risks related to aviation carbon emissions/ESG policies, risks of substantial increases in oil prices, risks of significant depreciation of the yuan, risks related to profit forecasts.