1Q16 net profit dropped on higher FX loss despite lower fuel cost

　　Both China Airlines (CAL) and EVA Airways reported their 1Q16 results underIFRS standard. On a consolidated basis, CAL’s revenue declined by 5.8% YoYto TWD35.0bn with 4.7% YoY growth in passenger revenue, offsetting by30.0% YoY drop in cargo revenue. Together with a 5.7% YoY decrease inoperating expense (mainly due to lower fuel cost) and 1.1x YoY increase innon-operating expense (mainly from higher FX loss), CAL’s operating profitdeclined 7.4% YoY to TWD2.4bn and net profit dropped 20.9% YoY toTWD1.5bn. The result accounted for 24% and 23% of our FY16 earningsforecast and consensus estimate, respectively; which we consider in line.Meanwhile, EVA’s revenue was up by 4.6% YoY to TWD34.9bn, as the 35.6%YoY decline in cargo revenue was offset by 8.7% YoY growth in passengerrevenue. Along with 1) a 6.6% YoY increase in operating expense with highermaintenance expense offsetting lower fuel cost and 2) 62.7% YoY growth innon-operating expense (mainly due to FX loss), EVA’s operating profit and netprofit declined 18.8% YoY and 47.0% YoY to TWD2.2bn and TWD1.1bn,respectively. The result accounted for 18% and 15% of our and consensusFY16 estimate, respectively; which is slightly below our expectation.

　　Deutsche Bank view – impact from low fuel cost priced in; Hold CAL and EVA

　　While the cargo business for Taiwanese airlines remains weak, we expect thepassenger demand outlook to improve heading into peak summer season with1) increasing numbers of Mainland Chinese tourists using cross-strait flightsand 2) increasing flights to Japan and US routes. We remain cautious on theyield outlook for both passenger and cargo businesses on increasing industrycapacity and fuel surcharge cuts for both Taiwanese airlines. We maintainHold on CAL and EVA on fair valuation.