China airlines plan stricter cost control on weaker yuan

Bloomberg

Airlines in China, the world’s second-biggest aviation market, plan to exercise stricter control over their costs and debt structures as part of measures to cope with a weaker yuan and stiffer competition. China Eastern Airlines Corp. will strengthen research on oil prices and exchange rates, the carrier said, a day after China Southern Airlines Co. said it will consider hedging for fuel. Air China Ltd. is transforming its business model in response to “intensified industry competition,” it said.
The nation’s ‘Big Three’ airlines saw a key measure of profitability known as passenger yield — money earned from carrying a customer one kilometer — drop during the first six months of this year as they expanded routes globally.
They also saw their combined foreign-exchange losses widen to 4.9 billion yuan ($733 million) in the period following a surprise devaluation of the Chinese currency in August 2015.
“Intensified industry competition and exchange rate fluctuations will remain,” Air China said in a statement to the Hong Kong Stock Exchange late Tuesday.
Airlines in China have ordered hundreds of planes from Airbus Group SE and Boeing Co. and are projected to double their fleet in the next 20 years as the nation overtakes the U.S. as the world’s biggest aviation market.
Air China rose 2.1 percent to HK$5.78 as of 10:47 a.m. in Hong Kong trading, and China Eastern advanced 2.5 percent to HK$4.10. China Southern gained 0.4 percent to HK$4.74, while Hong Kong’s Hang Seng Index rose 0.1 percent.

Weak Yields
Chinese carriers, which don’t hedge jet fuel prices, are among a handful of airlines worldwide to benefit the most from a slump in oil prices. Still, yields have been hurt by their expansion in international routes to better compete with rivals such as Cathay Pacific Airways Ltd. and Middle Eastern airlines.
China Southern, Asia’s biggest carrier by passengers, said its overall passenger yields fell 7.5 percent in the first half from a year earlier. The measure for overseas flights dropped 11 percent.
“It is a long-term strategy imperative to shift Asia’s largest airline from being a mostly domestic carrier to a global brand and position its home at Guangzhou as a leading hub,” said Will Horton, a Hong Kong-based analyst at CAPA Centre for Aviation. “That leads to short- and medium-term overcapacity and resulting weak yields.”

Dollar Debt
China Eastern, which ordered planes worth $9.9 billion in April, said foreign-currency-denominated liabilities amounted to 57.77 billion yuan. Loans in dollars, the preferred currency for aircraft purchases, accounted for 88.7 percent of that amount.
Air China — which has 59 percent of its total interest-bearing liabilities of 113.8 billion yuan in dollars — said it has increased the proportion of aircraft under operating leases to cut long-term dollar debt.
The carriers also highlighted global terrorism and geopolitical uncertainties among factors that could hurt the air-travel industry and their overseas plans.