NewChina Southern Airlines to reduce US dollar debt as foreign exchange losses hit profit

China Southern Airlines, Asia's largest airline by fleet size, said it would be cautious in buying new jumbo jets after its US dollar debt-funded spending spree hurt earnings with a 3 per cent depreciation of the yuan last year.

"We have no plans for big planes now that our international network is quite well served by our fleet," said Tan Wangeng, vice-chairman, president and chief executive of China Southern, which operated 612 aircraft at the end of last year, including 57 widebody planes, making its fleet the third largest in the world.

It reported on Tuesday a 10.5 per cent net profit drop to 1.7 billion yuan (HK$2.1 billion) even though revenue grew 10.2 per cent to 108.6 billion yuan.

The company blamed the profit squeeze on exchange losses in the year given yuan depreciation and its high foreign currency debt level - 93.3 per cent of its 113 billion yuan of borrowings and lease obligations were US-dollar denominated.

"We had an exchange loss of 292 million [yuan] compared with an exchange gain of 2.9 billion yuan, that is a difference of 3.2 billion yuan," said chief financial officer Xiao Lijun. He said the company has mostly borrowed in US dollars in recent years because it is the currency for aircraft purchases and because interest rates had been low.

"With the Fed possibly raising interest rates this year, we are looking to reduce currency risks by reducing our US-dollar debt ratio and have started to borrow in yuan. We may also increase the ratio of debts in euro," he said.