Morgan Stanley has released a research report expressing optimism for a multi-year cyclical improvement in the aviation sector, anticipated to commence in the fourth quarter of 2025 and gain momentum through 2026-2027, driven by demand. The report notes that while investor positioning and confidence remain low, the institution believes rising pricing will bolster market sentiment. Consequently, Morgan Stanley has raised its average price target for the aviation sector by 42% and upgraded its rating on the three major Chinese airlines' A-shares to "Overweight."

Specifically, Morgan Stanley increased its H-share price target for AIR CHINA (00753) from HK$8.11 to HK$10; for CHINA EAST AIR (00670) from HK$4.31 to HK$8.10; and for CHINA SOUTH AIR (01055) from HK$5.33 to HK$8.5. The bank assigned an "Overweight" rating to the H-shares of all three major mainland Chinese carriers.

The report forecasts an annual improvement in passenger load factors of 1 to 2 percentage points, indicating stronger pricing power for the airlines. Morgan Stanley holds a positive outlook on a multi-year, supply-driven upcycle for Chinese airlines and suggests there is potential for margin expansion if pricing performance exceeds expectations.

The bank projects that revenue per passenger kilometer will be largely flat in 2026, followed by a price increase of 3% to 4% in 2027. Its 2027 profit forecast is 17% above the current market consensus. Morgan Stanley estimates that each 1 percentage point beat in revenue per passenger kilometer could increase the average operating profit for the three major airlines by approximately RMB 1.5 to 1.7 billion. As a result, the bank has raised its 2026 pre-tax profit forecasts by 14% to 20% and its 2027 pre-tax profit forecasts by 11% to 12%.