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Airline Bond Yields Rise to Records as Oil Surges: China Credit

Airline Bond Yields Rise to Records as Oil Surges
China will become the biggest contributor to global air traffic over the five years ending 2014, the International Air Transport Association said. Photographer: Nelson Ching/Bloomberg

Bond yields for China’s largest airlines rose to records as soaring oil prices overshadowed plans to invest $228 billion in the world’s most populous nation’s aviation infrastructure.

China Southern Air Holding Co.’s 900 million yuan ($137 million) of 4.62 percent bonds due 2014 were last quoted by Chinabond at a yield of 5.199 percent, the highest since the debt was issued in 2009. The yield on Air China Ltd.’s 3 billion yuan of 3.48 percent bonds due 2014 is at 4.805 percent, the most since issue, Chinabond indicative prices show.

China will invest more than 1.5 trillion yuan in domestic aviation through 2015 as carriers add planes and more airports are built to cater to rising demand for air travel, Li Jiaxiang, head of the Civil Aviation Administration, said in Beijing yesterday. Oil climbed to the highest in 30 months in London after Li spoke as Libya’s civil uprising reduced shipments from Africa’s third-biggest producer.

“Right now people are more focused on oil prices and what’s happening in the Middle East and Africa than on the prospects for growth for Chinese airlines,” said Kelvin Lau, a Hong Kong-based analyst at Daiwa Institute of Research Pte. “If oil prices were to suddenly surge 50 percent, then there will be a problem for these carriers.”

China, which overtook Japan as the world’s second-largest economy, will become the biggest contributor to global air traffic over the five years ending 2014, the International Air Transport Association said on Feb. 14. Chinese air travelers may increase by 181 million on domestic routes, with an additional 33 million on international services in the period, IATA said.

Fuel Surcharges

China Southern Airlines, the nation’s largest carrier, led peers in raising fuel surcharges on domestic routes from Feb. 22 to help offset higher oil prices. Its shares fell 3 percent to HK$3.53 in Hong Kong yesterday, paring their gain over the past year to 18 percent.

The cost of insuring U.S. airline debt with credit-default swaps jumped this week after crude crossed $100 a barrel in New York for the first time since October 2008.

Five-year contracts on Atlanta-based Delta Air Lines Inc., the world’s second-largest carrier, climbed to a four-month high of 644 basis points on Feb. 23, according to data provider CMA. Contracts on Chicago-based United Continental Holdings Inc. and AMR Corp., the parent company of American Airlines, rose to the most in more than two months, CMA prices show.

The short-term impact of higher fuel prices may be offset by derivatives contracts the U.S. companies buy to hedge against price swings, according to Fitch Ratings. Those hedges typically tail off early next year, and a continued increase in oil prices may hinder efforts to reduce debt, Fitch analysts including Mark Sadeghian and William Warlick wrote in a Feb. 22 report.

Hedging Details

Fuel costs account for about 27 percent of airlines’ total spending, according to IATA. Air China has hedged about 40 percent of its total fuel requirement, while China Southern isn’t hedged, according to Daiwa Institute’s Lau.

Rao Xinyu, head of investor relations at Beijing-based Air China, declined to comment. No one in the media relations team for China Southern Air Holding was available when Bloomberg called the company’s main Guangzhou office yesterday.

The yuan traded near a 17-year high yesterday on speculation interest rates will rise. The Chinese currency slipped 0.07 percent to 6.5787 per dollar after reaching 6.5732 in Shanghai, according to the China Foreign Exchange Trade System. It’s gained 3.3 percent since a two-year peg was relaxed in June and touched a 17-year high of 6.5654 on Feb. 21.

Money Rates Drop

The benchmark money-market rate fell the most in three weeks on speculation banks are freeing up more cash. The seven-day repurchase rate, a gauge of the availability of funds, dropped 284 basis points to 3.4 percent, according to a daily fixing from the National Interbank Funding Center. That’s the biggest decline since Feb. 1.

The yield on the 3.77 percent government bond due December 2020 dropped 6 basis points to 3.91 percent, according to Chinabond, the nation’s biggest debt-clearing house. That’s the lowest since Jan. 13. A basis point is 0.01 percentage point.

China Eastern Air Holding Co., the parent company of the nation’s second-largest carrier China Eastern Airlines Corp., raised 500 million yuan from five-year bonds this week, Bloomberg data show. The bonds’ yield rose to 5.315 percent from 5.31 percent, according to Chinabond prices.

Adding Routes

China Southern Airlines, Air China and China Eastern Airlines, China’s three biggest carriers, are adding routes and increasing flights as economic growth and rising affluence spur demand for business and leisure travel. China had about 2,600 aircraft as of last year, when passenger turnover totaled about 267 million, according to the Civil Aviation Administration.

“Expansion of the aviation industry is very important for our country’s economic growth,” Li, who was previously Air China’s chairman, told reporters in Beijing yesterday. “Local governments are very keen on pushing forward development.”

Five-year credit-default swaps protecting China’s sovereign debt from default rose to 77.5 basis points on Feb. 23, the highest in more than three weeks, according to CMA. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.

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