China’s state-owned airlines have had a turbulent year and are warning of first-half earnings to match when they report this month.
With the bulk of their earnings in renminbi and fuel and aircraft costs denominated in US dollars, China’s big three airlines benefited from the Chinese currency’s steady appreciation against the greenback over the past decade.
But in recent weeks, Air China, China Eastern and China Southern have all issued profit warnings, citing foreign exchange losses from the renminbi’s unexpected weakening this year.
但在最近几周，中国国航(Air China)、东航(China Eastern )和南航(China Southern)都以今年人民币意外走弱造成汇兑损失为由，陆续发布了盈利预警。
China Eastern was the latest to brace shareholders for disappointing numbers. Last month it said it would book a first-half profit of less than Rmb50m ($8m) compared with a Rmb582m profit for the same period in 2013.
Based in Shanghai, China Eastern has been hit by recent cancellations from Chinese military exercises, which have caused widespread disruption to flights across eastern and central China.
As many as 26,000 flights could be affected by the time the People’s Liberation Army’s operations end in mid-August.
An unexpected reversal of the renminbi’s uptrend, with the Chinese currency slipping from Rmb6 to the dollar to Rmb6.25 earlier this year, has inflated the value of the carriers’ already high debt levels in local currency terms.
“Most of the negative foreign exchange impact comes from the balance sheet and the mark-to-market of their US dollar debt,” says Patrick Xu, aviation analyst at Barclays.
“These companies are very highly geared.”
Macquarie estimates that at the end of last year, before the renminbi began to fall, the big three’s net debt to equity ranged between 180 per cent and 267 per cent. China Eastern is the most heavily indebted, with its gearing expected to rise to almost 500 per cent next year.
But analysts at both Barclays and Macquarie have either “buy” or “hold” recommendations on Air China and China Southern, citing strong underlying passenger demand, their monopoly pricing power on lucrative domestic routes and a resumption of the renminbi’s upward trend. Barclays also recommends buying China Eastern shares, while Macquarie has an “underperform” rating on the stock.
Chinese airlines’ pricing power has insulated them from the worst effects of high fuel prices. While fuel is their biggest expense, at more than one-third of total costs, the big three – which spent Rmb99.9bn on fuel in 2013 – can pass along about 75 per cent of rises to Chinese passengers and 50 per cent to international ones.
The airlines are also contemplating a resumption of fuel hedging activities. China’s regulator banned the carriers from buying crude future contracts – a key form of protection against rising fuel costs – after they incurred heavy losses in 2009 by betting the wrong way on crude oil price movements.
Air China said in March that its board had approved a resumption in hedging activities “according to market conditions”, but confirmed on August 13 that it had not yet resumed the practice.
China Eastern and China Southern declined to comment on any plans to resume hedging.
In contrast, Hong Kong-based Cathay Pacific, which is also insulated from currency fluctuations by the Hong Kong dollar’s peg to the US dollar, has said that it has locked in 25 per cent of fuel requirements through the first half of 2015 at Brent crude oil prices of less than $100 a barrel. Singapore Airlines hedges up to 60 per cent of its fuel requirement. [update] On Friday Brent crude oil was trading around $102 a barrel.
香港国泰航空(Cathay Pacific)则宣布，已将直到2015年上半年的燃油需求的四分之一锁定在低于每桶100美元的布伦特原油(Brent crude oil)价格——由于香港实行盯住美元的联系汇率制，国泰航空也不会受到汇率波动的影响。新加坡航空(Singapore Airlines)将多达60%的燃油需求进行了对冲安排。上周五，布伦特原油的交易价格为每桶102美元左右。
“Managing risk associated with high and volatile fuel prices remains a priority,” said John Slosar, Cathay chairman. “Our fuel hedging extends to 2017.”