Air China

Airlines gain more than 6pc on yuan policy

PUBLISHED : Tuesday, 22 June, 2010, 12:00am
UPDATED : Tuesday, 22 June, 2010, 12:00am

Mainland airline stocks climbed more than 6 per cent yesterday as investors bet appreciation of the yuan will reduce carriers' dollar- denominated debt.

China Southern Airlines, which will benefit the most from yuan appreciation in terms of net profit growth, rose 6.5 per cent to HK$3.75.

China Eastern Airlines, which has the highest debt to equity ratio among mainland carriers, closed nearly 7 per cent higher at HK$3.74, while Air China gained 6 per cent to HK$8.49.

A more valuable yuan will reduce debt from aircraft acquisitions because mainland carriers earn revenue from the local currency but repay loans in US dollars.

China Southern said it would make a 500 million yuan exchange gain for every 1 per cent appreciation in the yuan. China Eastern and Air China are estimated to post about 400 million yuan in exchange gains for every 1 per cent yuan appreciation, analysts say.

But the rally in airline shares on yuan appreciation speculation might be short-lived, said Kelvin Lau, a transport analyst at Daiwa Capital Markets. 'Rallies driven by yuan appreciation won't last longer than a couple of days,' Lau said. 'It's more profit-taking than buying.'

Airlines continued to see growth in air traffic last month, although profit rose at a slower pace.

Carriers reported a profit of 1.23 billion yuan (HK$1.4 billion) last month, down from 2.07 billion yuan in April. Passenger volumes increased 18.2 per cent year on year last month to 21.5 million, compared with a 4.3 per cent rise in April. Cargo tonnage grew 36 per cent to 467,300 tonnes, after 31.6 per cent growth in April.

Air traffic between mainland and Taiwan increased 175 per cent year on year, while international traffic surged more than 71 per cent, outstripping the 18.8 per cent growth in domestic routes.

Li Jiaxiang, minister of Civil Aviation Administration of China, said Beijing would build four new airports in Fujian province in the next five years to cater for the fast-growing air traffic demand across the strait.

Cross-strait direct flights now number 380 every week and will be raised to 420 per week shortly. The frequency of flights 'is still far from enough', Li said at a forum in Xiamen on Sunday.

The government has ordered airlines to trim fares by between 10 per cent and 15 per cent in order to further boost passenger demand for direct flights.

A stronger yuan

Analysts estimate China Eastern and Air China will post about this amount, in yuan, in exchange gains for every 1 per cent yuan appreciation: 400m yuan