Air China Profit Plunges as Yuan Decline Compounds Debt

Air China Ltd., the country’s largest airline by market value, posted a 55.4 percent drop in profit in the first six months of the year as a weaker yuan inflated overseas debt payments.

Net income declined to 510 million yuan ($82.9 million) in the six months ended in June from a year ago based on international accounting standards, the Chinese flag carrier said in a statement to the Shanghai stock exchange. The profit was in line with the 55 percent to 65 percent decline forecast by Air China on July 14.

The yuan fell more than 2 percent against the dollar in the first half of this year, driving up costs for Air China, which has 70 percent of its debt denominated in the greenback at the end of 2013. Foreign exchange losses are expected to also weigh on the earnings of China Eastern Airlines Corp. and China Southern Airlines Co., which are slated to report first-half results later this week.

“Chinese airlines’ earnings are very sensitive” to the exchange rate, Patrick Xu, a Hong Kong-based airline analyst with Barclays, said in a note dated Aug. 20. “The earnings impact mainly comes from marking-to-market U.S. dollar-denominated debt and hence is mostly non-cash.”

Air China shares fell 1.8 percent to close at HK$4.88 in Hong Kong before the earnings announcement. The stock has dropped 16 percent this year, compared to a 7.6 percent gain in the benchmark Hang Seng Index.

Exchange Loss

The Beijing-based carrier said it booked a net foreign exchange loss of 721 million yuan in the first six months this year, compared with a 1.1 billion yuan net gain in the year earlier period.

Air China’s net gearing ratio stood at 71.8 percent at the end of June, almost unchanged from end-2013, the company said in the Shanghai statement. Its passenger yield, a measure of sales per seat per passenger mile, declined 3.3 percent to 0.58 yuan, the country’s third-largest airline by volume said in a statement to the Hong Kong exchange.

The carrier served 40.14 million passengers in the first six months, 7.2 percent more than a year earlier, according to the statement. Overall load factor was 80.6 percent, compared with 81.1 percent a year ago, it said.

(Corrects passenger yield in seventh paragraph of story published Aug. 26.)
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