Hong Kong company reporting season

China Southern Airlines first half profit falls 10.7pc on forex losses

PUBLISHED : Monday, 29 August, 2016, 10:31pm
UPDATED : Monday, 29 August, 2016, 10:56pm

China Southern Airlines, Asia’s largest carrier by passenger traffic, saw its first-half net profit drop 10.7 per cent as exchange rate losses expanded amid large swings in the value of the yuan.

Net income fell to 3.1 billion yuan in the first six months despite revenue having increased by 1.4 per cent to 54 billion yuan in the same period.

Following a rapid depreciation of 4 per cent during from August to December 2015, the Chinese yuan further devalued more than 2 per cent against US dollar in the first half of 2016, resulting in a 1.5 billion yuan foreign-exchange loss for the airline during the period compared to a 156 million yuan loss in the same period in 2015.

In a filing to the Hong Kong stock exchange on Monday, China Southern said it has optimised its currency-related debt structure to respond to drastic fluctuations in the exchange rate.

“Through advanced repayment of US dollar liabilities and a swap of US dollar obligations under finance leases, the proportion of US dollar liabilities was reduced. The financing proportion of renminbi increased to 50.8 per cent from 31.7 per cent at the beginning of the year, therefore the impact of the exchange loss decreased,” said the airline’s chairman Wang Changshun.

The Guangzhou-based state-run airline had a forex loss totalling 5.7 billion yuan by the end of 2015, the largest among mainland Chinese companies.

In the first half, the airline’s passenger traffic rose by 7.7 per cent while flight operation expenses decreased by 6.4 per cent thanks to cheaper jet fuel.

We will focus on filling the gap in the route network and launch various routes including Guangzhou-Toronto and Guangzhou-Adelaide
Wang Changshun, China Southern Airlines chairman

Wang doesn’t expect fuel prices to increase dramatically in the second half, adding that the civil aviation market continues to be robust and that the volume of passengers in the whole industry will maintain a 9.5 to 10 per cent growth.

“We will focus on filling the gap in the route network and launch various routes including Guangzhou-Toronto and Guangzhou-Adelaide,” he said.

The airline launched six new international routes in the first half, including Shenzhen-Sydney, Shenzhen-Wuhan-Dubai and Shanghai-Fukuoka, and increased flights for the Guangzhou-Los Angeles and Guangzhou-New York routes.

The company has allocated more than 30 per cent of its resources to international transport capacity.

At the end of June, China Southern owned 684 aircraft, each with an average age of 6.6 years, ranking it top in Asia and fifth in the world in terms of fleet size.

For the summer travel season, HSBC analysts led by Jack Xu expect strong profitability among major Chinese airlines, including China Southern, as airports in top-tier cities such as Beijing and Shanghai are constrained, which in turn leads to stronger pricing power.

For the full year, analysts expect stable growth for China Southern because oil prices are likely to remain low and currency exchange losses will be narrowed.

“The exchange loss by the end of 2016 is likely to stay at about 1.5 billion yuan,” Feng Sheng, an analyst at Sealand Securities, wrote in a note before the results announcement.

China Southern shares dipped 0.6 per cent to HK$5.04 in Hong Kong on Monday. The stock has increased 2 per cent in the past 12 months.