Major Chinese airlines incur US$165m in forex losses

China's four largest airlines suffered a more than 50% decline in their net profits in the first half of this year. Industry insiders attributed the fall to foreign exchange losses, Guangzhou investment magazine Money Week reports. The four suffered 1.047 billion yuan (US$165.75 million) in forex losses, or a 112.7% increase, the report said. Chinese airlines, which have large foreign debts denominated in the US dollar, have previously enjoyed the benefits of a rising renm inbi. Since the beginning of this year, however, the renminbi has risen only slightly, leading to mixed forecasts for the currency's movement. The fall in the airlines' net profits was mainly due to soaring prices and declining exchange rates, said Li Xiaojin, a professor at Civil Aviation University of China in Tianjin. Airlines typically incur large forex liabilities. The main fixed assets of Chinese airlines are aircraft, which are mostly manufactured by foreign enterprises. In addition, they take large loans denominated in foreign currencies. Since Chinese airlines' liabilities are largely denominated in the US dollar, they have enjoyed forex gains from a rising yuan in the past. However, as the yuan begins to lose momentum, these gains have turned into significant losses, a securities analyst said. The Money Week report said that in the first half of this year, the exchange rate of the renminbi against the US dollar had dro pped 0.39%, causing great losses to the "big four," with Air China suffering the largest losses. In the fourth quarter last year, the renminbi rebounded before registering a 0.72% fall in the second quarter of this year. As a result, Air China registered losses of 340 million yuan (US$53.83 million) in the first half of this year, accounting for a 45% decline in the carrier's profits in the first half of this year. In the past, forex gains accounted for a large portion of airlines' profits, far exceeding their net annual profits. For instance, China Southern Airlines' forex gains accounted for 670% and 136% of its net profits in 2006 and 2007, respectively. An analyst said foreign exchange profits contributed to 20%-30% of airlines' overall profits in 2011 and were expected to fall this year. Although a weak renminbi ate into their net profits in the first half of this year, airlines did not take any action to preven t further depreciation. On the other hand, some enterprises have been concerned about rumors of institutions short selling the Chinese currency. To ease their concerns, China's State Administration of Foreign Exchange recently published a report stating that the exchange rate was at a reasonable level and there was no large-scale short selling taking place in the renminbi. A Merill Lynch report said that although the renminbi is expected to rise in the long term, it will drop in the short term. Source: Want China Times from China Travel & Tourism News http://www.chinatraveltourismnews.com/

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