China's three biggest airlines face S$1.73b in currency losses

A China Southern Airlines aircraft flying over a pedestrian bridge as it approaches to land at Hongqiao Airport in Shanghai, China, on Oct 23, 2015.
A China Southern Airlines aircraft flying over a pedestrian bridge as it approaches to land at Hongqiao Airport in Shanghai, China, on Oct 23, 2015. PHOTO: BLOOMBERG

HONG KONG (BLOOMBERG) - China's three biggest airlines are poised to report losses totaling 8.5 billion yuan (S$1.73 billion) from currency swings this year as a weaker yuan proves a drag amid rising traffic and cheaper fuel. The silver lining: The losses are narrowing.

Flagship carrier Air China Ltd may face 3 billion yuan in foreign-exchange losses, while China Southern Airlines Co, Asia's biggest by passengers, is looking at a potential hit of 4 billion yuan and China Eastern Airlines Corp may lose about 1.5 billion yuan, according to Taipei-based Capital Securities Corp. That compares with a combined loss of 16.2 billion yuan in 2015. The carriers are scheduled to announce their first-half earnings this week.

A strategy to trim US dollar-denominated debt may be paying off as the airlines seek to shield their earnings from declines in the yuan, according to Capital Securities. A weaker local currency typically hurts companies that borrow in dollars to pay for imports such as aircraft. An unexpected devaluation of the yuan last year led to an 18-fold surge in currency losses in 2015 for the three carriers.

"The yuan's devaluation raised foreign exchange loss and interest costs for the airliners," said Mr Castor Pang, head of research at Core-Pacific Yamaichi Hong Kong. "The yuan has stabilised after a tough second quarter and this will ease the burden on their bottomline. The second half should be much better."

The local currency depreciated 2.3 per cent against the US dollar in the six months through June, making it the worst performer in Asia. The yuan, trading at about 6.67 against the greenback, is likely to weaken about 2 per cent more by the end of 2017, according to the average estimate of forecasts in a Bloomberg survey.

Shares of Air China and China Eastern have declined about 0.7 per cent and 5 per cent this year in Hong Kong, compared with a 12 per cent slide in the Bloomberg Asia-Pacific Airlines Index, according to data compiled by Bloomberg. Cathay Pacific Airways, the marquee Hong Kong-based airline that is facing competition from its mainland peers, has slumped 15 per cent.

Jet fuel that cost about 30 per cent less on average in the first half compared to a year earlier provided a buffer as the carriers enjoy the benefits of cheap oil helped by their policy not to hedge. They have added more routes in a market where passenger traffic is growing 12 per cent annually, more than twice the pace of Europe and North America.

"Chinese carriers are in a better position in pricing than their rivals because they don't hedge on fuel and their cost is lower," said Mr K Ajith, an analyst at UOB Kay Hian Pte in Singapore. "On top of that, their international traffic is rising."