Chinese Airline Stocks Get Clobbered After Currency Devaluation

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China Southern Airlines Co. led a tumble by the nation’s biggest carriers on concern that yuan devaluation will increase the size of their dollar-denominated debt and hurt earnings.

China Southern ended down 18 percent in Hong Kong in its biggest loss since the aftermath of the September 2001 terror attacks in the U.S. Air China Ltd. sank 13 percent, while China Eastern Airlines Corp. tumbled 16 percent. The Hang Seng Index slipped 0.1 percent.


China’s central bank cut its daily reference rate for the yuan by a record 1.9 percent on Tuesday, triggering the currency’s biggest one-day loss since China unified official and market exchange rates in January 1994. China Southern says every 1 percent drop in the yuan cuts 767 million yuan ($121 million) from its annual profit, according to an analysis in the carrier’s 2014 financial report.


“Airlines are losers from the currency’s weakness” because of the size of their foreign debts, said Wenjie Lu, a Shanghai-based strategist at UBS Group AG.

At the end of 2014, 93 percent of China Southern’s debt was in dollars, compared with 97 percent for China Eastern and 73 percent for Air China, according to their annual reports.

The yuan dropped 1.8 percent on the day to 6.3231 per dollar.


China’s airlines are due to report higher first-half earnings this month amid a plunge in fuel prices. China Southern said it swung to a profit of as much as 3.6 billion yuan in the first half of the year from a net loss of 1 billion yuan a year earlier. The company is scheduled to release figures on Aug. 28. Air China has said net income in the period rose as much as 743 percent.

“Given this year’s substantial increase in earnings already, it’s likely this yuan depreciation will create a small dent, compared to past years,” said Geoffrey Cheng, head of transportation and industrial research for Bocom International Securities Ltd. in Hong Kong.

China Southern declined 7 percent in Shanghai, while China Eastern slid 7.5 percent and Air China fell 6 percent. The Shanghai Composite ended nearly unchanged on the day.