Cur­rency hit proves drag on air­lines

China’s top three car­ri­ers seen post­ing loss of com­bined $1.3 bil­lion on weaker yuan


China’s three big­gest air­lines are poised to re­port losses to­tal­ing 8.5 bil­lion yuan ($1.3 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 Lt­d­may 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 Cap­i­tal Se­cu­ri­ties Corp. That com­pares with a com­bined loss of 16.2 bil­lion yuan in 2015. The car­ri­ers are sched­uled to an­nounce their firsthalf earn­ings this week.

As­trat­egy to trim 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 un­ex­pected­de­val­u­a­tion 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 ex­changelosses and in­ter­est costs for the air­lin­ers,” said Cas­tor Pang, head of re­search at Core-Pa­cific Ya­maichiHongKong.

“The yuan has sta­bi­lized af­ter a tough sec­ond quar­ter and this will ease the bur­den on their bot­tom line. The sec­ond-half should be much bet­ter.”

The lo­cal cur­rency de­pre­ci­ated 2.3 per­cent against the 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 per­cent more by the end of 2017, ac­cord­ing to the av­er­age es­ti­mate of fore­casts in a sur­vey.

Shares of Air China and China Eastern have de­clined about 2 per­cent and 6 per­cent this year in Hong Kong, com­pared with a 13 per­cent slide in the Bloomberg Asia Pa­cific Air­lines In­dex, ac­cord­ing to data com­piled by Bloomberg.

Cathay Pa­cific Air­ways Ltd, the mar­quee Hong Kong-based air­line that is fac­ing com­pe­ti­tion from its main­land peers, has slumped 15 per­cent.

Jet fuel that cost about 30 per­cent less on av­er­age in the first half com­pared to a year ear­lier pro­vided a buf­fer as the car­ri­ers now enjoy the ben­e­fits of cheap oil, helped by their pol­icy not to hedge.

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