Chinese airlines become collateral damage in trade war with US

An Air China Airbus A330-200 aircraft takes off from Zurich Airport January 9, 2018. (Reuters pic)

SINGAPORE: Chinese airlines ordered more than $100 billion of planes from Airbus SE and Boeing Co. in the past decade. Paying those bills is getting harder with the trade war pushing the local currency to its weakest level in six months.

Air China Ltd., China Southern Airlines Co. and other carriers will need to pay more for new aircraft, which are always priced in dollars. The airlines also need to spend in foreign currency for fuel purchased overseas, which is somewhat cushioned by international ticket sales. All told, the carriers are bracing for more expenses and fewer passengers as trade tensions build up between the world’s two biggest economies.

Investors have pummeled the shares of the country’s three biggest carriers on concern the weaker yuan will result in a dip in earnings. Flag carrier Air China Ltd. has tumbled 20% in Hong Kong since June 13, while China Southern Airlines Co. and China Eastern Airlines Corp. have slid 23% and 17% since June 14, losing a combined market value of about $11.5 billion.

“Trade concern is the one that’s pushing the yuan down,” said Mohshin Aziz, an aviation analyst at Maybank Investment Bank Bhd. in Kuala Lumpur. “That’s the root cause of all the branches of troubles we’re going through.”

A weaker yuan also means higher interest payments on the dollar-denominated debt. Air China had about $21 billion of dollar-denominated debt; China Southern had $18 billion; and China Eastern $11 billion, according to data compiled by Bloomberg.

The Chinese currency has declined almost 5% since touching its strongest level since 2015 in late March amid trade tensions with the US and this week’s decision by the People’s Bank of China to cut the reserve requirement ratio — a move set to unlock 700 billion yuan ($107 billion) of liquidity effective July 5.

Every 1% fluctuation in the dollar would translate to a loss or gain of 280 million yuan annually for Air China, 278 million yuan for China Southern and 260 million yuan for China Eastern, according to K. Ajith, a Singapore-based analyst at UOB Kay Hian Pte.

Representatives for the airlines didn’t immediately respond to emails for comments.

Chinese carriers have been expanding their fleets as they add new destinations to serve a market the International Air Transport Association estimates will surpass the US as the world’s biggest by as early as 2022. They had a combined fleet of about 3,200 planes at the end of 2017, compared with a little less than 2,000 five years earlier, according to data from the Civil Aviation Administration of China.

Boeing predicts China will need more than 7,200 new aircraft worth over $1 trillion in the 20 years through 2036.

After the peak Lunar New Year boosted their performance in the first quarter, the carriers are looking to improve profitability after the nation’s aviation regulator allowed them to raise ticket prices on routes with ample competition. Air China reported a 79% surge in net income in the three months through March, while China Southern said profit jumped 80%. China Eastern, however, reported a 30% drop because an asset sale boosted earnings in the previous year.