China's three largest carriers see profits shrink as yuan slumps
China's three major airlines, Air China, China Eastern Airlines and China Southern Airlines, have seen the depreciating yuan take a bite out of their profits in the first half of 2016, the companies' interim financial reports showed.
Air China reported 1.7 billion yuan ($255 million) in foreign exchange losses, up from 123 million yuan in the first six months of 2015, according to its interim financial results released on Wednesday.
China Eastern lost about 1.4 billion yuan over the same period, up from 56 million yuan in the first half of 2015.
China Southern Airlines reported 1.5 billion yuan in foreign exchange losses in its half-year financial report on Tuesday. The company lost 160 million yuan from currency swings in the first six months of 2015.
The three major airlines are expected to take a combined hit of 11.5 billion yuan from currency swings this year, according to a report that Capital Securities sent to the Global Times on Tuesday.
Capital Securities projected that Air China and China Southern will each lose about 4 billion yuan this year due to foreign exchange swings, and China Eastern will lose about 3.5 billion yuan.
Because most domestic airlines borrow in dollars to pay for imports, a depreciating yuan increases their burden of paying back the debt, which weighs on their bottom line, He Minliang, an aviation analyst from Capital Securities, told the Global Times on Tuesday.
China Southern's profits slumped to 3.1 billion yuan in the first half of 2016, down 10.65 percent year-on-year, according to the company's half-year report.
Nonetheless, apart from the currency factor, China Southern's main business remains "robust," He said.
In the first six months of 2016, China Southern's revenues edged up 1.36 percent year-on-year to about 54 billion yuan. Passenger bookings increased 2.22 percent during the period to about 55 million.
China Eastern and Air China's profits also declined by 9.29 percent and 12.45 percent, respectively, in the first six months in 2016.
Ongoing depreciation
He predicted that the yuan would not depreciate as much as it did in 2015, so the airlines' losses from currency swings should narrow this year.
The yuan depreciated by about 6 percent in 2015, according to media reports.
The three carriers took a combined loss of 16.2 billion yuan from exchange losses in 2015, Bloomberg reported on Monday.
The yuan depreciated by about 2.3 percent against the US dollar in the first six months in 2016.
He's firm forecast a total of 5 percent devaluation of the yuan for 2016, so the yuan will fall another 2.7 percent against the dollar by the end of the year.
Zhou Yu, director of the Research Center of International Finance at the Shanghai Academy of Social Sciences, also predicted the yuan would depreciate against the dollar in the second half, just not as much.
Still, he cautioned the yuan might depreciate more than expected if the US raises interest rates this year.
"For the next two to three years, the market will continue to expect the yuan to depreciate," Zhou told the Global Times on Tuesday.
Dealing with debt
The airlines have taken steps to relieve the financial pressure caused by the slumping yuan, such as trimming dollar-denominated debt.
China Eastern, for example, paid off $1 billion in loans in January this year as part of its efforts to restructure its debt.
According to Zhou, domestic companies' repayment of dollar-denominated debt is one of the major reasons behind the country's rapid loss of foreign exchange reserves, so the government has reason to keep such activities in check.
While paying off dollar-denominated debt, the airlines have also been issuing yuan-denominated bonds. Air China, for example, announced on August 3 that it was approved to issue up to 12 billion yuan corporate bonds. China Eastern issued 1.5 billion yuan in corporate bonds on July 20.
Their goal is to have a greater proportion of their debt denominated in yuan.
China Southern's proportion of yuan-denominated debt rose to 50.8 percent from 31.7 percent over the first half, according to the company's half-year report.
Of course, issuing bonds domestically also has drawbacks, such as higher interest payments, said He, the aviation analyst.
