Air China, China Southern Profits Decline on Currency, Fuel

China’s three biggest airlines reported a second straight decline in annual profits as they struggled with currency fluctuations and fuel costs amid a slower economic growth.

Air China Ltd. (753), Asia’s biggest carrier by market value, said yesterday that net income in 2012 fell 35 percent because of higher expenses and a smaller gain from its stake in Cathay Pacific Airways Ltd. (293) China Eastern (670) Airlines Corp. and China Southern Airlines Co. (1055) also reported lower profits.

The uncertain global economic outlook and higher fuel costs led to greater operational difficulties for the industry last year, Air China said. The carriers said they expect domestic demand to rebound in 2013 as China’s growth may accelerate under the new leadership after the weakest expansion in 13 years.

“China’s big three carriers were all affected by currency last year,” Zhou Meng, a Shanghai-based analyst at Shenyin & Wanguo Securities Co., said. “But they are fortunate to count on the domestic market.”

Air China, based in Beijing, rose 4.2 percent to HK$7 in Hong Kong trading today. China Southern advanced 0.2 percent while China Eastern gained 1.2 percent.

Japan Tension

All the three airlines said their foreign exchange gains slumped more than 90 percent in 2012 because of the yuan’s slower appreciation against the dollar compared with a year earlier. Chinese carriers benefit from a stronger local currency as it pares the repatriated value of dollar-denominated debts used to buy planes and fuel overseas.

They were also hurt by a territorial dispute between China and Japan since tension intensified in September. China Eastern sees no signs of recovery in travel demand between the two countries at present, Ma Xulun, its vice chairman told reporters in Hong Kong today. Both China Eastern and Air China have cut capacity and still fill only 63 to 68 percent seats on China- Japan routes, trailing their average levels.

China is still the market with the biggest potential in the world,” Air China said in its statement. “At the moment, China’s economic growth is still relatively high.”

The nation’s growth will probably accelerate this year and next as the world’s second-biggest economy weathers a fragile global recovery, according to the Organization for Economic Cooperation and Development. Expansion may reach 8.5 percent this year and 8.9 percent in 2014, the OECD said on March 22.

The economy expanded 7.9 percent in the final three months of last year, the first acceleration in two years. Full-year growth of 7.8 percent was the least since 1999.

Jetstar Hong Kong

Air China’s net income fell to 4.64 billion yuan ($746 million), under international accounting standards, from 7.08 billion yuan a year earlier, the carrier said. That compares with the 4.24 billion-yuan average profit estimate of 10 analysts compiled by Bloomberg.

China Eastern, which is setting up a budget carrier in Hong Kong with Qantas Airways Ltd (QAN)’s Jetstar Group, said it is “open” to bring local investor into the equally-owned venture as it is waiting for Hong Kong government’s approval for an operation license, Ma said.

The budget airline, called Jetstar Hong Kong, is targeting its first flights by the end of this year with two Airbus SAS A320s, he said. By comparison, China Eastern said earlier it expects the carrier to start flying in June with three A320s.

Cathay Stake

Air China’s income from its stake of about 30 percent in Cathay plunged 91 percent to 88 million yuan after the Hong Kong carrier suffered an 83 percent plunge in annual profit. Cathay also holds about a 19.3 percent stake in the Chinese carrier.

China Eastern, the nation’s second-biggest carrier by passengers, said profit declined to 2.95 billion yuan, trailing the 3.20 billion-yuan average profit estimated by 13 analysts. Net income at China Southern was 2.62 billion yuan, compared with the average estimate of 2.78 billion yuan in a Bloomberg survey of nine analysts.

The yuan reference rate climbed 0.3 percent against the dollar last year, according to the China Foreign Exchange Trade System. That compares with a 5.1 percent jump in 2011.

Air China said fuel costs rose 2.7 percent last year, according to the H.K. filing. China Southern’s spending on fuel jumped 14.5 percent while China Eastern had a 2.2 percent increase.

Air China filled 80.4 percent of seats last year, 1.06 percentage points lower than a year earlier, as capacity growth outpaced travel demand. Passenger yield, a measure of average airfare, fell 1.47 percent, according to the company statement. China Southern’s passenger yield dropped 1.5 percent.

A380s

Air China is still in talks with China Southern to cooperate on flying A380s from Beijing to Paris, Air China chairman Wang Changshun told reporters today. It had proposed to lease two of the five A380s China Southern runs, Wang said.

China Southern missed a target date for introducing the A380 on international flights from Beijing at the end of October, prolonging a more than yearlong struggle to gain access to slots in the nation’s capital. The company said in August it was in talks with Air China about the partnership.

China Southern mainly deploys A380s on domestic routes at present, after failing to win approval for flying the superjumbo for overseas services from Beijing.

To contact the reporter on this story: Jasmine Wang in Hong Kong at jwang513@bloomberg.net

To contact the editor responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net

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