China: Major airlines set for sunnier skies after lowering US dollar debt levels
China’s three major airlines are on course for improving earnings this year amid ongoing passenger traffic growth and diminished concerns over foreign exchange losses. In anticipation of a further depreciation in the Chinese yuan, Air China, China Eastern Airlines and China Southern Airlines have been cutting their US dollar debt exposure, from above 70% at the peak level to below 50% by year-end 2016. Because Chinese airlines earn most of their revenue in yuan, they are vulnerable to shifts in foreign exchange markets, even though borrowing abroad can be cheaper than the interest rates on offer domestically. “The lower US dollar debt levels have mitigated the risks of foreign exchange loss,” said Vincent Ha, an analyst from Deutsche Bank. “For US dollar debt, Chinese airlines still seem to be aiming for more cuts. As such, we see... lower foreign exchange losses.” In previous years, Chinese airlines have been hesitant to covert US dollar debt into yuan-denominated equivalents due to higher borrowing costs. However, thanks to ample liquidity in the Chinese banking system, options to refinance in yuan are now available at compelling rates, according to Ha. In the past, lower interest rates on US dollar borrowings, combined with a backdrop of a strengthening Chinese yuan, led to practises where Chinese airlines would typically finance more than 70% of aircraft procurement and leasing agreements in US dollars. But this benign scenario came to an end when the Chinese yuan made an abrupt U-turn from what had been a long period of appreciation against the greenback, slipping 4.6 and 6.9% against the US dollar in 2015 and 2016 respectively. That led to combined foreign exchange losses at the three major airlines of 16.1b yuan in 2015, and 11.6b yuan in 2016, according to estimates by Deutsche Bank. Further depreciation in the yuan is expected, with Deutsche Bank forecasting the currency will ease to 7.4 per US dollar by the end of 2017 and 8.1 per US dollar by end 2018.<br/>
https://portal.staralliance.com/cms/news/hot-topics/2017-03-22/general/china-major-airlines-set-for-sunnier-skies-after-lowering-us-dollar-debt-levels
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China: Major airlines set for sunnier skies after lowering US dollar debt levels
China’s three major airlines are on course for improving earnings this year amid ongoing passenger traffic growth and diminished concerns over foreign exchange losses. In anticipation of a further depreciation in the Chinese yuan, Air China, China Eastern Airlines and China Southern Airlines have been cutting their US dollar debt exposure, from above 70% at the peak level to below 50% by year-end 2016. Because Chinese airlines earn most of their revenue in yuan, they are vulnerable to shifts in foreign exchange markets, even though borrowing abroad can be cheaper than the interest rates on offer domestically. “The lower US dollar debt levels have mitigated the risks of foreign exchange loss,” said Vincent Ha, an analyst from Deutsche Bank. “For US dollar debt, Chinese airlines still seem to be aiming for more cuts. As such, we see... lower foreign exchange losses.” In previous years, Chinese airlines have been hesitant to covert US dollar debt into yuan-denominated equivalents due to higher borrowing costs. However, thanks to ample liquidity in the Chinese banking system, options to refinance in yuan are now available at compelling rates, according to Ha. In the past, lower interest rates on US dollar borrowings, combined with a backdrop of a strengthening Chinese yuan, led to practises where Chinese airlines would typically finance more than 70% of aircraft procurement and leasing agreements in US dollars. But this benign scenario came to an end when the Chinese yuan made an abrupt U-turn from what had been a long period of appreciation against the greenback, slipping 4.6 and 6.9% against the US dollar in 2015 and 2016 respectively. That led to combined foreign exchange losses at the three major airlines of 16.1b yuan in 2015, and 11.6b yuan in 2016, according to estimates by Deutsche Bank. Further depreciation in the yuan is expected, with Deutsche Bank forecasting the currency will ease to 7.4 per US dollar by the end of 2017 and 8.1 per US dollar by end 2018.<br/>
