ANALYSIS: Chinese carriers' profit slumps on lower exchange gains

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The global economic downturn, lower foreign exchange gains and high fuel price were the driving factors China's three state-owned carriers cited for the sharp dips in their 2012 financial results.

While China Southern Airlines' net profit plunged by about 50%, its peers Air China and China Southern Airlines' earnings fell by about a third each.

Snapshot: 2012 financial results for three leading Chinese airlines

2012

Revenues

Change

Net profit

Change

Op profit

Change

Air China 101bn 2.5% 4.6bn -34.5% 6.2bn 31.2%
China Eastern 85.3bn 3.5% 2.8bn -39.0% 4.2bn 1.3%
China Southern 99.5bn 10.0% 2.6bn -49% 5.0bn 17.0%
Source: Flightglobal Pro, all figures in Chinese Yuan

Last year, the Chinese yuan also rose at a slower pace against the US dollar, causing the carriers' foreign exchange gains to slump between 90% and 96%.

China Southern Airlines, the largest local carrier by fleet size, recorded a 49% dip in its net profit to yuan (CNY) 2.62 billion as its exchange gains fell by 90%. Even though the Guangzhou-based carrier's revenue for the year rose 10% to CNY99.5 billion, the highest among the three carriers, its expenses increased by a similar amount to CNY95.9 billion.

The airline spent CNY33 billion on fuel, 14.5% more than in 2011 and the largest hike compared with China Eastern's 7.2% and Air China's 2.7% increases.

"China Southern has the best top-line growth. Its revenue growth at 10% compares favourably to Air China's 2.5% growth and China Eastern's 4.5% growth. The revenue growth came in despite weak international pax yields," says UOB Kayhian analyst K. Ajith. "We believe the airline was deliberately cutting prices to gain market share and its international yields will gradually improve."

Flag carrier Air China meanwhile reported a net profit of CNY4.63 billion, down 34.5% from a year earlier. It's full year earnings would have risen 14%, had there not been a 96% drop in exchange gains.

While it carried 74.4 million passengers, 3.9% more than a year ago, its cargo revenue declined 14.4% to CNY8.42 billion.

"Demand in the aviation industry in 2012 continued to be weak as a result of the slow recovery of the US economy, the on-going European debt crisis and the global recession," says the carrier. "Escalating operating costs from high jet fuel price and the intensifying competition added to the challenges faced by the industry."

Shanghai-based China Eastern Airlines, which saw a 39% dip in its 2012 net profit to CNY2.81 billion, adds that the global economic downturn resulted in decreased demand in both international and domestic passenger traffic as well as the freight market.

All three airlines' cargo revenues took a tumble as they faced "unprecedented challenges" due to the weak demand in both international and domestic cargo market.

The carriers' yields have also dropped because of the "intensified competition" on domestic routes as travellers increasingly take to the country's high-speed rail. China Eastern's domestic yields fell 4.4%, compared with China Southern's 1.5% and Air China's 1.6% dips.

"The greatest risk domestically is the competition from the high-speed rail because it's more convenient and less delays. Unless China can liberalise their airspace further, it could be difficult for the airlines to compete with rails on the short routes," says Ajith.

The airlines are maintaining a cautious attitude in their 2013 outlook, expecting moderate recovery of the global economy resulting in demand for international aviation to maintain a low growth rate.

"China's economic development will remain in a period of strategic opportunities and is expected to recover moderately in 2013 which however, affected by adverse factors such as domestic macroeconomic control and weak external demand, will not be a robust rebound," says China Southern.