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Tuesday, April 22, 2014

Air China Expects First Quarter Profits to Tumble

Chinese flag carrier Air China Ltd. says it expects first quarter net profits to fall by up to 65%, citing soaring finance expenses due to the weaker Chinese yuan.
The profit warning from the Beijing-based carrier comes just days after rival China Southern Airlines Co. warned it was likely to post a net loss for the three months ended March 31, also because of the yuan's depreciation.
A weak yuan has a significant impact on Chinese airlines' bottom lines as a lot of their debt for the financing of aircraft purchases isn't denominated in the Chinese currency. A large proportion of that debt is dollar-denominated and airlines also have dollar-denominated aircraft lease and jet fuel purchase obligations.
The Chinese yuan fell by 2.7% in the first quarter against the U.S. dollar, after several years of consistently strengthening as the government moved to depreciate the currency.
Air China late Monday said it expects to report a 55%-65% decline in first quarter net profit, compared with a net profit of 249 million yuan ($40 million) in the first quarter of 2013.
At the end of last year, Air China's net debt was worth 111.60 billion yuan, of which 70% was denominated in U.S. dollars. China Southern's net debt was worth 104.35 billion yuan.
The weaker yuan adds pressure on China's state airlines, which last year saw net profits drop by more than a quarter as intensifying competition weighed on ticket prices, despite growing demand for air travel. Still, the weakening yuan could have a limited impact, especially if the currency stabilizes, as foreign-exchange losses at Chinese state airlines are mostly noncash losses because they are required under accounting rules to revalue their substantial foreign-currency debts at the end of every quarter.
The other Chinese state carriers—Air China Ltd. and China Eastern Airlines Corp.—are due to release first-quarter results in late April, and the government is moving to liberalize the domestic airline market and promote the growth of budget airlines.
Source: Wall Street Journal Jeffrey Ng


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