China’s top three airlines pledge to lower US dollar debts amid forex risk

Chinese airlines rethink their financing plans after annual results show forex losses eroded many of the benefits from tumbling fuel prices

PUBLISHED : Thursday, 31 March, 2016, 8:35pm
UPDATED : Thursday, 31 March, 2016, 9:16pm

Foreign-exchange losses at mainland airlines are under the spotlight after the Big Three state-owned airlines’ profits were eclipsed by 16 billion yuan (HK$19.19 billion) of losses brought about by the devaluation of the Chinese yuan last year.

“We have switched to renminbi financing for all the aircraft we will introduce in 2016, that is US$1.4 billion worth of financing that we would have been done in US dollar before,” said Xiao Lixin, chief financial officer of China Southern Airlines at a briefing in Hong Kong on Thursday. The airline has slashed the ratio of its US dollar denominated debts by 30 percentage points in 2015. The ratio stands at 61 per cent as of the end of December after the airline repaid nearly US$7 billion of debts, he said.

Mainland airlines are racing to cut their large US dollar denominated debt - once favoured because of the currency’s low interest rate and the renminbi’s steady appreciation - after fluctuation of the Chinese currency last year, partially cancelled out their gains from tumbling oil prices.

National carrier Air China, which booked an exchange loss of 5.2 billion yuan, said it plans to issue as much as 12 billion yuan in bonds. Lu Lingfei, deputy general manager of finance department, told a press briefing on Thursday that it has also arranged for the sale and leaseback of 18 new aircraft slated to join its fleet this year, which takes the assets off its balance sheet and shifts the currency risk to the aircraft lessor.

“We have already arranged for six of the aircraft to be on renminbi lease from a domestic lessor,” Lu said.

Air China is targeting to cut its US dollar debt level to around 60 per cent this year, while China Southern aims to bring it down to below 50 per cent, the companies said. China Eastern, which reported a full year profit of 4.54 billion yuan and an exchange loss of 4.99 billion yuan, said it has reduced its US dollar debt level to 53 per cent by the end of February.

Yu Nan, an analyst with Haitong Securities in Shanghai, said he is not too worried about the airlines’ currency risks this year as they have further cut their US dollar debt level in the first quarter.

“If the renminbi undergoes the same fluctuation this year, their foreign exchange losses would be one third smaller,” Yu said.

The airlines’ growing international flights, fueled by China’s outbound travel fervour, is expected to provide a level of natural hedge as they book more income in foreign currencies. Air China said it now already deploys more capacity on international routes than domestic, and that premium classes on international flights had revenue contribution of 30 per cent.

China Southern’s chief executive Tan Wangeng said the airline’s international business achieved profit for the first time in 2015.

“International contributed to more than 20 per cent of total profit,” Tan said.

Both airlines said they plan to add international capacity by more than 20 per cent in 2016, even though they also acknowledged yield had declined last year because of overcapacity and competition in the industry.

The airlines also denied reports in the past year that they might merge.

Air China’s shares closed 4.56 per cent higher at HK$5.5 on Thursday, while China Southern rose 4.7 per cent to HK$4.9 and China Eastern rose 3.83 per cent to HK$4.34.