Weaker currency weighs on airline profits in first half

A weaker yuan crushed the first-half net profits of China's three largest airlines, statements from the carriers show.

China Eastern Airlines Co Ltd on July 18 estimated that its net profit would be no more than 50 million yuan ($8.06 million) in the first six months, compared with 763 million yuan a year earlier.

Air China Co Ltd, the flag carrier, warned of a profit decline of 55 to 65 percent in the first half of 2014, according to a statement on July 14.

And China Southern Airlines Co Ltd, the largest carrier in China by fleet size, has been hit even harder. An announcement said its first-half net loss was 900 million to 1.1 billion yuan, compared with a year-earlier profit of 339 million yuan.

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All cited exchange losses, which resulted from the yuan's depreciation in the first half, while they all posted exchange gains in 2013.

As of June 30, the middle rate for the renminbi was 6.1528 per dollar, down 538 basis points from Jan 1.

The depreciation drove up the carriers' financial expenses, as their liabilities-mostly aircraft purchases-are mainly in dollars, analysts said. They added that China Southern, with the largest fleet, has more dollar-denominated debt than the others, and its profit fell accordingly.

Declining income has also cut the carriers' profit, as China's entire aviation industry is "in recession", said Su Baoliang, an aviation analyst at Citic Securities Co Ltd.

In the first half, the carriers' average load factor declined year-on-year, as did ticket prices, Su said.

"We forecast that the recession of the civil aviation industry in China will persist until the second half of next year," Su said.

The airlines also need to consider the future, as their capacity is increasing faster than demand, Su said.

Macroeconomic growth in China will continue to be slow, he said, and that will affect demand for air services.

"To get more income, the airlines need to control their fleet expansion. We will see slight capacity growth in the next two years," Su said.

In the short term, income is likely to rise in the third quarter, which is the peak travel season, said Huang Jinxiang, an analyst at Haitong Securities Co. At that time, load factors and ticket prices will be higher, Huang said.