Domestic airlines could face financial turbulence

Major Chinese airlines face a turbulent time with a weaker yuan trimming profits.

Even though the air traffic market is still strong, industry experts are predicting a bumpy ride ahead for the country's big three carriers.

"The three largest carriers in China could lose between 2 billion ($312 million) and 4 billion yuan each in net profit this year after the rate of the yuan (to the US dollar) dropped this year," Geoffrey Cheng, head of transportation and industrial research at BOCOM International, which is part of the Bank of Communications Co, said. "But this year's decline in fuel prices will help counteract the carriers' exchange loses."

The decision by the People's Bank of China, or central bank, to depreciate the yuan by around 2 percent against the US dollar earlier this month is likely to affect outbound tourism and reduce air traffic demand.

But Fang Xiahong, an analyst from Central China Securities, a research and investing information company, is slightly more upbeat about the move.

"Outbound demand will reduce slightly, but a cheaper yuan will attract more foreign passengers visiting China," she said. "On the other side of the coin, the depreciation will increase financial costs for carriers because most purchases are in dollars."

China Southern Airlines Co Ltd, which has the largest fleet in the country and also more debt than its main rivals, will be hit by the yuan depreciation.

"The most significant impact is that airlines usually have high dollar-denominated debt. Obviously, that will increase because of the cheaper yuan," Fang said.

But Chinese airlines have a strong domestic network, which will prove vital in the months ahead. Another crucial factor involves regional currencies. China's neighbors have been quick to devalue their currencies to stay competitive.

"As regional currencies depreciate more than the yuan, Chinese tourists will be tempted to continue to travel," Cheng, at BOCOM International, said.

Still, many Chinese airlines are unsure about the exact effect the fall in the yuan will have on their long-term revenue streams.

"Hopefully, the depreciation is a temporary fluctuation and will show up in the year-end financial report," Zhang Wu'an, a spokesman for Spring Airways, China's first publicly listed carrier, said.

In the first half of this year, net profits from China's carriers soared compared with the same period last year. That was partly due to the fall in fuel prices.

The big three of Air China, China Eastern Airlines and China Southern Airlines have posted, or are expected to report, respectable first half figures.

China Eastern Airlines reported a net profit of 3.564 billion yuan in the first half of this year. Air China has forecasted a net profit of between 3.8 billion yuan and 4 billion yuan for the same period.

China Southern Airlines has predicted a net profit of between 3.4 billion yuan and 3.6 billion yuan.

But while the fall in the yuan has yet to show up on their books, it has already had an impact on the share prices of airlines on the Shanghai Composite Index. Aviation shares have fallen on average by 2.25 percent by Aug 14.

wangwen@chinadaily.com.cn