Chinese airlines face headwinds from weakening yuan

The yuan’s depreciation is most keenly felt by the country’s airlines, as the weaker currency makes aircraft and jet fuel more costly, while its weaker buying power abroad deters outbound tourism and crimp their revenue. “A weaker yuan will typically hurt airlines the most because they have to pay for aircraft and jet fuel in US dollars but generate most of their revenue in yuan,” said Victor Au, Delta Asia Securities’ chief operating officer. China Eastern Airlines placed orders for 20 Airbus aircraft this year. “The yuan’s depreciation also lifts interest costs for airlines which raise a lot of dollar-denominated debt,” Au said. The yuan weakened 3.1% last year, leading to an 18-fold surge in foreign exchange losses, or US$2.5b, for the mainland’s three biggest carriers – China Southern Airlines, Air China and China Eastern. As much as 80% of their debt was denominated in dollars last year, according to Bloomberg data. The yuan’s deterioration has gathered pace this year with a 6.2% drop against the dollar. “Accelerated yuan depreciation since October [last year] implies higher risk of foreign exchange losses for Chinese airlines,” said Edward Xu, an analyst with Morgan Stanley who has an “underweight” recommendation on Air China’s shares. The broker cut its earning estimates for all mainland airlines from this year to 2018. Next year’s earnings of the Big Three are expected to decline by between 9 and 10% for every 1% that the yuan weakens against the dollar, according to a research report by Macquarie, which is recommending investors to “sell” airline shares. Adding to the carriers’ woes, analysts are also expecting the price of jet fuel to increase, reversing the previous declining trend.<br/>