Morgan Stanley is optimistic about the upward cycle of the three major Chinese airline stocks and has significantly raised the target price

Morgan Stanley published a research report indicating that the multi-year cyclical improvement in the aviation industry, starting in the fourth quarter of 2025, is likely to gain momentum in 2026 to 2027, driven by demand. Investor positioning and confidence remain low, but the firm believes that rising prices will boost market sentiment, thus raising the average target price for the aviation sector by 42% and upgrading the ratings of the three major airlines' A-shares to "Overweight." Morgan Stanley raised the target price for Air China (00753.HK) H-shares from HKD 8.11 to HKD 10; China Eastern Airlines (00670.HK) H-shares from HKD 4.31 to HKD 8.10; and China Southern Airlines (01055.HK) H-shares from HKD 5.33 to HKD 8.5. Morgan Stanley gives all three major mainland airlines' H-shares an "Overweight" rating.

The firm expects the annual passenger load factor to improve by 1 to 2 percentage points, indicating that airlines will have stronger pricing power. It holds an optimistic view on the multi-year supply-driven upcycle for Chinese airlines and believes that if pricing performs better than expected, there is room for margin expansion. The firm expects passenger kilometer revenue to remain flat in 2026, followed by a price increase of 3% to 4% in 2027. The earnings forecast for 2027 is 17% higher than the market consensus. Morgan Stanley estimates that for every 1 percentage point that passenger kilometer revenue exceeds expectations, the three major airlines could see an average increase of approximately RMB 1.5 billion to 1.7 billion in operating profit, leading to an upward revision of the pre-tax profit forecast for 2026 by 14% to 20%, and for 2027 by 11% to 12%