Clouds over airline earnings
Weakening yuan, rising oil prices erode profits of 3 major carriers
It’s no surprise that China’s three largest airlines had their best earnings results in four years in 2016. China Southern Airlines, Air China and China Eastern Airlines earned a combined 16.38 billion yuan ($ 2.37 billion) in net profit in 2016, compared with 11 billion yuan in 2012, according to their latest fiscal reports.
The results signal a recovery in the domestic airline industry, though the clouds of rising fuel costs and a depreciating yuan continue to cast a shadow over the business.
But before getting into that, let’s review the airlines’ earnings for 2016.
Air China’s revenue grew 4.62 percent to 113.96 billion yuan, and its net profit crept up 0.59 percent to 6.81 billion yuan.
China Eastern Airlines’ revenue rose 5.03 percent to 98.56 billion yuan, though its net profit slipped 0.73 percent – their first drop since 2013.
China Southern Airlines’ revenue grew 2.95 percent to 114.79 billion yuan, and its net profit leapt 29.88 percent to 5.06 billion yuan.
It’s easy to see that China Eastern’s revenue grew the most, even though its net profit fell from a year earlier. Also, the revenue gap between Air China and China Southern narrowed.
Although China’s three largest airlines performed better than their foreign competitors still struggling with the global economic downturn, their earnings failed to meet analyst expectations.
Three Chinese airline giants would earn 19.5 billion yuan in profit in 2016, according to Bloomberg.
Reuters reported Air China’s profits fell short of analysts’ forecasts, which predicted a full- year net income of 7.35 billion yuan.
The airlines had been on track to meet analyst forecasts, but hit some turbulence in the fourth quarter of 2016. Through the first three quarters of 2016, the three airlines had reported a combined profit of 20.36 billion yuan.
In the fourth quarter, losses eroded those gains. For example, China Southern reported a 1.39 billion yuan loss in the fourth quarter – its largest since 2009.
Fuel costs and a depreciating yuan are the main culprits.
Fuel is an airline’s largest single expense. It typically makes up about onethird of an airline’s total operating costs. Data from previous reports showed that the average fuel cost for Chinese airlines was about 39 percent in 2014.
The International Air Transport Association predicted that fuel cost accounted for less than 20 percent of airlines’ total operating costs in 2016 due to a drop in crude oil prices. The cost of fuel for Chinese airlines is normally about 25 percent.
The depreciating yuan has also hurt the airlines’ bottom lines. In 2016, the yuan depreciated 6.39 percent against the US dollar. As a result, the three airlines reported a combined exchange loss of more than 11 billion yuan.
Air China has said that it loses 376 million yuan for every 1 percent the Chinese currency depreciates against the dollar.
The airlines are sensitive to the exchange rate because they have considerable debts denominated in dollars. When the US currency appreciates against the yuan, those debts effectively grow larger and cost more to repay.
In 2015, the three airlines’ foreign exchange losses due to the yuan’s depreciation against the dollar jumped to 15.85 billion yuan from 837 million yuan in the previous year.
The airlines have taken steps to pare those losses by buying currency swaps and by reducing their dollar debts. China Southern, for example, paid back $ 1.84 billion in debt in advance in 2016.
As for 2017, there are still many uncertainties ahead, including the outlook for crude oil prices and exchange rates, as well as geopolitical risks and growing competition.
China Southern warned that the fluctuating exchange rate and the expansion of China’s railway network will be challenges for the years ahead.
Beijing- based Air China said its challenges include sluggish cargo market demand, geopolitical events, intensifying competition and a continuously appreciating US dollar.
Luckily, soaring domestic demand for overseas flights has bolstered the airlines’ revenue.
Also, the airlines are increasing cooperation with foreign airlines, which will also boost overseas demand.
The latest news is that American Airlines invested $ 200 million in 270 million Hong Kong- listed shares of China Southern, Asia’s largest airline by fleet size, which is expected to help China Southern expand in North America.