FX volatility blights profits at Asian airlines

China Southern signals plans to join fuel-hedging market – but recent results from Cathay Pacific highlight inherent business risks

Forex woes have damaged the performance of China’s three biggest, state-run airlines, according to figures released by the Shanghai Stock Exchange.

The data shows that profits at China Southern Airlines and China Eastern Airlines dipped by 10.4% and 9.3% respectively over the first half of 2016.

A 6% devaluation of the yuan between August 2015 and the end of June this year was cited as the root cause.

There were also signs that China’s much-discussed economic slowdown has eaten into the nation’s travel habits. China Southern announced a 0.2% drop in passenger numbers over the first half of 2016, with tourism and business travel declining.

Air China also suffered, with profits down 17.5% between January and June, and cargo revenue dropping by 13.2%. Meanwhile, there was a 16.4% slump in cargo and mail activity at China Eastern.

Explaining its performance to investors, Air China said: “Competition in the international passenger aviation market intensified and the demand for cargo transport remained slack.”

Southern’s chairman Wang Changshun said that his carrier had worked hard to mitigate its problems through “advanced repayment of US-dollar liabilities” and a swap of its dollar obligations under finance leases, reducing its commitments around the US currency.

In tandem with that, he added: “The financing proportion of renminbi increased to 50.8% from 31.7% at the beginning of the year – therefore, the impact of the exchange loss decreased.”

In efforts to stem further losses, the airline announced, it would break a long-standing pledge not to engage in fuel hedging, and would consider joining the market when fuel prices “reach the ideal level”.

However, the airline’s policy switch arrives in the vapour trails of poor financial results from Hong Kong carrier Cathay Pacific, attributed directly to fuel hedging.

In mid-August, the airline released figures for the first half of 2016 showing that it had taken a $482m hit as a result of its fuel-hedging strategy – after losing $117m last year through the very same programme.

Upon the publication of those figures, Cathay Pacific chairman John Slosar said: “We expect the operating environment in the second half of the year to continue to be impacted by the same adverse factors as in the first half.

“The overall business outlook therefore remains challenging… Overcapacity and economic fragility will dampen cargo demand. Fuel prices have increased this year, but are still lower than in previous periods.”

He added: “The benefits from lower fuel prices will continue to be partially offset by losses on our fuel-hedging contracts. The fuel surcharge remains suspended.

“In this difficult environment, we will manage capacity and strive to make further improvements in operational efficiency. We will also continue to be vigilant on costs.”

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