Across The Border
by

Chinese airlines face new storm clouds

PUBLISHED : Thursday, 06 April, 2017, 5:15pm
UPDATED : Thursday, 06 April, 2017, 10:10pm

Chinese airlines just can’t seem to catch a break.

An expected improvement in profits this year among China’s major airlines is looking a lot less certain in recent times thanks to falling ticket prices brought about by fierce competition.

The situation is a heart break for airlines that have worked hard to improve their debt structure by paying down US dollar-denominated borrowings.

The nation’s top three carriers China Southern Airlines, Air China and China Eastern Airlines raised funds domestically to help offset their US dollar debt, amid concerns of growing foreign exchange losses. The Chinese yuan lost 7 per cent against the greenback in 2016.

That’s a big deal for Chinese airlines that pay for aircraft and energy in dollars but generate most revenue in yuan.

The yuan’s depreciation against the dollar means Chinese carriers have struggled against a growing US debt burden.

Asia’s largest carrier, China Southern said it recorded a foreign-exchange loss of 3.27 billion yuan (US$473.79 million) last year, a drop of 45 per cent from a 5.95 billion yuan loss in 2015, after actively adjusting its debt structure. The proportion of China Southern’s debt denominated in yuan increased to 51.16 per cent from 30.69 per cent after it repaid US$1.84 billion ahead of schedule.

“The yuan financing ratio will reach 70 per cent by the end of this year, then our foreign-exchange losses will decrease further,” said Xiao Lixin, chief finance officer of China Southern. “We expect the Chinese yuan will further depreciate in the coming two years.”

Improvements in debt structure were also recorded at rival carriers China Eastern Airlines and Air China. Air China recorded a forex loss of 4.2 billion yuan, down 17.9 per cent, or 922 million yuan, as compared to 2015.

The decrease was primarily due to the reduction of interest-bearing debt in US dollars.

Sales of yuan-denominated bonds by the three carriers in 2016 rose threefold on year to 135.4 billion yuan, according to Bloomberg data.

Accordingly, Air China’s dollar-denominated debt fell to 49 per cent from 73 per cent, China Eastern’s declined to 45 per cent from 73 per cent and China Southern’s eased to 49 per cent from 69 per cent.

However, expectations of improvements to the bottom line failed to materialise, as carriers aggressively expanded capacity, bolstered route networks and lowered prices in an effort to win customers.

China Southern reported 2016 net profit jumped 35 per cent to 5.04 billion yuan. However, China Eastern reported 2016 net profit fell 1 per cent to 4.5 billion yuan while Air China reported net profit of 6.8 billion yuan, reflecting a drop of 3.6 per cent on year.

Yield per revenue passenger kilometre (RPK), the average amount that a passenger pays to fly one kilometre, fell sharply on international routes amid strong competition.

China Southern reported 2016 RPK yield fell 3.6 per cent on domestic routes and 11.1 per cent on international routes on year.

“The competition among major carriers, especially for international routes, caused the yield decline, and now most carriers own wide-body jets which are available for long-haul flights,” said Luo Laijun, acting director of the commercial steering committee at China Southern.

China Eastern’s yield per RPK declined 2 per cent on domestic routes and 15.6 per cent on international routes in 2016 from the previous year.

“Chinese domestic airlines have aggressively expanded their international capacity in the last two years... the fare per passenger is falling,” said Andrew Herdman, director general of the Association of Asia Pacific Airlines. “But I see a general balance of capacity and supply in China’s airline industry.”

Available Tonne Kilometres (ATK), a measure of an airline’s capacity, inclusive of passengers and freight, is another way to gauge the expanded offerings of airlines.

In 2016, China Eastern’s ATK increased 19.3 per cent, while China Southern’s rose 22.8 per cent. “The aggressive expansion of capacity is expect to reduce ticket prices,” said Shen Xiaofeng, an analyst at Hua Tai Securities.

Among rivals bearing the brunt of expansion is Cathay Pacific Airways. Hong Kong’s home carrier reported a 2016 loss of HK$575 million, its first in eight years.

Hong Kong’s Cathay Pacific aiming for HK$4 billion in cuts over three years

“The [competition] pressure that Cathay is facing is not unlike the pressure many other airlines face,” Herdman said. “Competition is the feature of the industry.”

Cathay is reportedly planning a 30 per cent cut in staff costs at its head office.

“They need to study very carefully before announcing a new plan,” said Herdman. “Business restructuring usually takes one to three years. But in terms of reorganisation, I think they will start in several months.”

business-article-page