• FY25 core profit of HKD10.4bn and full-year dividend of HKD0.84/share came in ~17% and ~27% above street respectively
• Raise our FY26F operating profit by 1%, mainly reflecting higher passenger load factors and yields, partly offset by higher fuel costs, but lower core net profit by 4% on weaker profitability at Air China
• While CX appears relatively better positioned than regional peers, visibility is clouded by multiple uncertainties, particularly surrounding Middle East conflict
• Maintain HOLD with revised TP of HKD 12.0 (prev HKD 11.7), as we roll forward our valuation base to FY26F

FY25 results were supported by strong traffic growth and moderating yield normalisation, with cost discipline cushioning margin pressure. FY25 core net profit of HKD10.4bn beat street by ~17%, with the full-year dividend of HKD0.84/share also well ahead of consensus (HKD0.66). The key positive in the 2H25 print was the moderation in CX passenger yield compression, with yield declining 8.2% y/y to HKD60.5 cents versus a steeper 12.3% y/y decline in 1H25, suggesting the pace of normalisation is easing. Capacity expansion remained robust with ASK rising 25.4% y/y in 2H25 while RPK increased 27.9% y/y, lifting passenger load factor to 85.6% (+1.7ppt y/y). Group operating profit reached HKD8.1bn in 2H25, with operating margin edging down modestly to 13.0% from 13.3% in 2H24 as yield compression was partly offset by lower unit costs. The bulk of the unit cost improvement came from depreciation operating leverage from higher aircraft utilisation, while some pressure remained from staff costs and higher landing, parking and route charges as the network continues to rebuild. Cargo demand held up with RFTK rising 6.6% y/y in 2H25, while yield recovered sequentially to HKD2.77 following a stronger Q4 peak season despite tariff front-loading earlier in the year. HK Express remained loss-making with 2H25 EBIT at –HKD472mn (–13.1% margin), reflecting weaker Japan demand following last summer’s earthquake rumour as well as continued losses on newly launched routes that are still maturing, though the management highlighted improving aircraft utilisation, cost efficiency and on-time performance as supportive of its path back to profitability.

Demand trends remain supportive, bolstered by the Middle East disruption. Even prior to the Iran war, demand was strong, with management highlighting that March and April flights are mostly full. The subsequent reduction in Middle Eastern carrier capacity is now driving market share gains for CX, as displaced passengers increasingly reroute through Hong Kong. Asia-Europe is the most exposed corridor, where Middle Eastern carriers account for c.30% of capacity, while the impact on Asia-North America is smaller at c.10%, largely tied to Indian traffic flows. Overall, the conflict has tightened supply against an already firm demand backdrop.

The group’s own direct exposure to the Middle East is limited, mainly comprising daily services to Dubai and Riyadh. Capacity has been redeployed into other markets, including additional London services and the use of larger aircraft on the Zurich route. However, while long-haul demand is strong, only widebody aircraft can operate these routes and utilisation is already high. The group is also constrained by existing bookings, and can only redeploy aircraft on flights that are further out. Even if the conflict were to resolve quickly, disruptions could persist for months as capacity and operations take time to normalise.  For the full year, management guided for c.10% passenger capacity growth, driven by the delivery of eight additional narrowbody aircraft in 2026 as well as the carry-through of capacity ramp-up through 2025.

Meanwhile, the impact on air cargo has so far been relatively contained, with management noting that freighter demand has not seen a material uplift given flights were already largely full, although some Europe-bound freighters that previously stopped in Dubai are now flying directly with payload restrictions. For HK Express, Greater Bay Area cities have become an increasingly important structural revenue base and are now the carrier’s second largest point of sale after Hong Kong, contributing around one-third of revenue. Performance at HK Express improved towards the end of last year and into the first couple of months of this year, following earlier weakness that was partly linked to Japan earthquake rumours and network concentration. Expansion into Korea and Southeast Asia has helped diversify the network, and utilisation and cost efficiency are moving in the right direction. Consequently, losses are expected to narrow this year, although fuel remains a key swing factor.

However, the potential upside to yields will be partly capped, given that long-haul cabins were already heavily pre-booked and load factors were at elevated levels prior to the conflict. Ticket prices are still rising, as the disruption forces passengers to book the remaining available seats, which are typically the highest yielding. CX has also raised fuel surcharges sharply, with the latest increase roughly doubling the surcharge. Management highlighted that in the current environment, surcharges can be revised more frequently than usual, although once announced they remain fixed until the next revision. Ultimately, fare levels will still be determined by supply and demand dynamics on each route. On routes with weaker load factors, there may be limits to how much total ticket prices can increase.

Fuel costs remain the key near-term uncertainty for margins. Fuel surcharges are being adjusted across both passenger and cargo operations, and while CX is relatively better positioned than many regional airlines that are largely unhedged, its hedging is primarily linked to Brent rather than jet fuel, leaving it exposed to widening crack spreads. The group does not intend to change its hedging policy. Margin pressure is a real near-term risk amid soaring jet fuel prices. In addition, HK Express is more vulnerable than the full-service carrier, as its customer base tends to be more price sensitive.

Ex-fuel unit costs should continue to decline in FY26, albeit at a more modest pace. Staff costs per ATK have been rising despite higher capacity deployment, largely due to higher pilot and cabin crew wages, which remain above pre-pandemic levels. The most acute cost pressures are currently seen in maintenance, while landing charges have also risen as airports increase fees. Nonetheless, with c.10% capacity growth expected, ex-fuel unit costs are still projected to decline, supported by operating leverage.

FY26F earnings adjustments. We raise our FY26F operating profit by 1% to HKD 12.8bn (-9% y/y), mainly reflecting higher passenger load factors and yields, partly offset by higher fuel costs. While base-load yields are expected to continue normalising in 1H26, we assume incremental loads are achieved at c.30% higher yields y/y. For 2H26, we forecast low-single digit yield growth y/y as the sector gradually normalises. With CX’s c.30% hedge position, we estimate that every USD5/bbl change in jet fuel prices translates to roughly a 13% impact on operating profit, ceteris paribus.  

At the net profit level, we revise FY26F core earnings lower by 4% to HKD 8.9bn (-15% y/y), primarily due to weaker profitability at Air China. Around 4% of its international flight capacity is exposed to the Middle East, and its unhedged fuel position increases its sensitivity to rising jet fuel prices. The impact is more pronounced across the state-owned Chinese airlines, as they are still in the recovery phase and continue to operate on relatively thin margins. Coupled with the China-Japan flight curbs, this could exacerbate oversupply as capacity is redeployed on other routes. Their hubs are also less competitive as global transit points, limiting their ability to capture diverted transfer demand. Combined with weaker pricing power, this leaves them more exposed to higher jet fuel prices.

Lingering uncertainty and multiple unknowns surrounding the Middle East conflict. While CX looks better positioned than most regional airlines given its limited direct Middle East exposure, stronger premium long-haul network and ability to capture displaced transit traffic through Hong Kong, its ability to capitalise on higher air fares and displaced demand in the near term is still constrained. Flights over the next few months already have high base load factors and there is only limited incremental seat inventory left to sell at meaningfully higher fares. This is further compounded by a widebody deficit, with all aircraft deliveries this year being narrowbodies and therefore offering little relief to long-haul capacity tightness where displaced demand is most relevant. The key uncertainty is not just how long the war lasts, but how long it takes for traffic patterns and fuel markets to normalise after any ceasefire, particularly if travellers continue to avoid Middle East hubs.

Maintain HOLD with revised TP of HKD 12.0 (prev HKD 11.7), as we roll forward our valuation base to FY26. Our TP is based on 4.6x forward EV/EBITDA, close to 1.5 SD below its five-year pre-pandemic average.

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