Weakened yuan takes $1.6bn shine off Chinese airlines' profits

SHANGHAI: China's weakening yuan cut $1.6 billion from profits earned by the country's three largest airlines last year, denting a sector whose fortunes have risen on the back of the country's travel boom.

Air China , China Eastern Airlines  and China Southern Airlines all missed analyst expectations on Thursday, with their foreign exchange losses totalling 11.04 billion yuan ($1.6 billion).

These airlines have aggressively ordered new aircraft to take advantage of strong travel demand from China, the world's fastest growing aviation market. However the loans they took for these purchases were mainly denominated in US dollars.

This exposed them to depreciation of the yuan which lost 6.6 percent of its value against the surging dollar last year in its biggest annual fall since 1994.

"Exchange rate fluctuations, increased international geopolitical disputes and foreign terrorist events had adverse effects on the industry," said China Eastern Airlines in its annual report.

Each airline said they were trying to reduce their share of US dollar-denominated loans, with China Southern saying that it had paid down $1.8 billion of such loans early, increasing its share of yuan-denominated financing from 30.7 percent to 51.2 percent.

Their results also showed how the benefits of low fuel prices, which had boosted their earnings in 2014 and 2015, were starting to fade as global oil prices recovered. Air China's fuel bill, which shrank 30.4 percent in 2015, fell by only 8.6 percent last year.

"China's aviation industry is still in an important period of opportunity, the market potential is still huge," China Southern said in its earnings report.

"However, at the same time, we are facing a rebound in global oil prices, fluctuations in the yuan exchange rate, global competition as well as the expansion of the high-speed rail network."

Air China posted a 0.6 percent rise in full-year profits attributable to shareholders while China Eastern's dipped 0.7 percent. China Southern reported a 30 percent rise in its profits attributable to shareholders.

These headwinds could mean further profit drops in 2017, analysts say.

"Higher oil price, renminbi depreciation, I think those factors are still going to be in play in 2017, 2018," said Jefferies analyst Andrew Lee.

"Once those two catalysts start coming back in again I think what you see is that earnings will have peaked in 2016, and we're forecasting lower earnings in 2017."