Currency turbulence: Chinese airlines brace for yuan headwinds
Chinese airlines are fretting over their high US-dollar exposure as the yuan continues to take a hammering. As one of the sectors most vulnerable to yuan depreciation, they now need a crash course on managing currency risks – something they did not have to worry about in the past thanks to the Chinese currency’s steady appreciation.
As the yuan began the new year with wild gyrations and is poised to weaken further, Chinese airlines are bracing for currency headwinds this year after posting record profits in 2015 despite yuan devaluation in the second half of the year.
Beijing-based flag carrier Air China that had 71.3 per cent of its 114 billion yuan worth of debt denominated in US dollar as of June – lowest among the three big state-owned airlines – is trying to lower that ratio.
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“We are closely monitoring the market. We plan to adjust our debt structure to have the US dollar ratio in between 50 and 60 per cent this year. Depending on market conditions, we will probably increase renminbi debts,” said a senior executive who requested anonymity because he is not authorised to speak to the media.
“We are also studying currency hedging. But debt structure optimisation is the main instrument we are looking at now,” he said. “Because we have a bigger international operation [than other mainland airlines], revenue collected in local currency gives us a higher degree of natural hedging.”
Citi bank last week forecast the yuan will depreciate a further 9 per cent this year to 7.2 to the US dollar. China’s airlines stand to lose billions of dollar if the yuan weakens given their largely dollar-denominated debts for aircraft purchases.
China Southern, which boasts Asia’s largest fleet with more than 600 planes, has the largest US dollar exposure, with every percentage of yuan movement translating into 767 million yuan in earnings. That compares with 466 million yuan for Air China and 628 million yuan for China Eastern, which said in a notice to the Hong Kong Stock Exchange this month that it recently repaid a principal of US$1 billion in order to improve its debt structure.