Air China has reported 9M26 results: revenue was RMB140,963mn, up 8.6% YoY; attributable net loss reached RMB2,015mn, vs attributable net profit of RMB1,870mn in 9M25. In 3Q, revenue was RMB51,695mn, up 5.4% YoY; attributable net profit was RMB271mn, down 92.6% YoY. 3Q26 attributable net profit was RMB130mn below our estimate of RMB400mn. The weak 3Q earnings were due to ineffective pass-through of higher fuel prices during the summer peak. Fuel prices remain elevated, and an earnings recovery is likely to require a pullback in fuel prices. Sector valuations and market attention are at low levels, but medium-to-long-term supply growth is unlikely to accelerate, and anti-involution measures are being implemented. We expect industry fundamentals to continue to improve, and anticipate stronger earnings performance once fuel costs stabilize. Maintain BUY.
Peak-season capacity growth turned positive YoY
In 3Q26, the company deployed capacity during the peak season and achieved a notable improvement in passenger load factor (PLF). Overall ASK rose 5.1% YoY (vs -4.1% YoY in 2Q), and PLF improved 3.7pp YoY to 86.0%. International ASK grew rapidly at 10.4% YoY, seizing opportunities in international aviation hub development, while domestic ASK rose 3.5% YoY, and a sharp improvement from -5.8% in 2Q. PLF was strong across the board, with domestic/international up 3.5/4.4pp YoY to 87.2%/83.8%. However, 3Q yields were weak YoY likely to absorb supply growth and boost PLF. We estimate yield per RPK fell c. 5% YoY, with little peak-season effect.
Oil price pressure dented NP, with notable YoY pullback
In 3Q26, operating costs rose 17.9% YoY to RMB49,860mn, and unit cost per ASK rose 12.1% YoY. The average ex-factory jet fuel price rose 42% YoY, while unit cost excluding fuel was likely stable YoY. With weak pass-through of high fuel prices during the peak season, gross profit fell sharply by 72.9% YoY to RMB1,835mn. Financial costs fell 34.9% YoY to RMB822mn, potentially reflecting lower interest expenses and FX gains. Investment income/other income climbed up 15.7/10.5% YoY to RMB995/1,225mn. Nevertheless, 3Q26 attributable net profit was only RMB271mn, down 92.6% YoY.
Earnings forecasts and valuation
As international oil prices remain elevated and peak-season fares were weak, we cut our 2026 earnings forecast to a net loss of RMB4,265mn (previous: net loss of RMB3,012mn), and lower our 2027/2028 forecasts by 20/5% to RMB4,027/ 8,708mn. We expect 2026E BVPS of RMB2.95 (previous: RMB3.02) and maintain 2026E PB at 2.7/1.8x for the A/H shares. The company's 10Y average PB for the A/H shares is 2.2x/1.5x, yet we still apply a premium as we expect the industry to trend upward once oil prices stabilize, potentially driving ROE and profitability breakthroughs. Our target prices are RMB8.00 for the A-shares and HKD6.10 for the H-shares (previous: RMB8.15/HKD6.30). Maintain BUY.
Risks: weaker demand growth than we expect, faster industry fleet expansion than we expect, higher maintenance and other cost growth than we expect, sharp decline in investment income from Cathay Pacific, fuel price and FX risks, and safety incidents.