Chinese airlines carried more passengers in 2011, but rising fuel costs mandated by a state monopoly and paid for in dollars after being earned in yuan undermined passenger gains.
China’s three major state-owned airlines posted sharp drops in annual profit because of the weak global economy, higher jet fuel prices and smaller foreign currency gains.
China Southern, the country’s biggest carrier by passenger numbers, said Wednesday that profit plunged by half compared with the previous year. Rivals Air China and China Eastern reported that earnings tumbled by about a third.
“Demand in the aviation industry in 2012 continued to be weak as a result of the slow recovery of the U.S. economy, the on-going European debt crisis and the global recession,” Beijing-based Air China said. “Escalating operating costs from high jet fuel price and the intensifying competition added to the challenges faced by the industry.”
China Eastern said the average price of fuel rose 2 percent. The Shanghai-based carrier reported that profit fell 35 percent to 2.95 billion yuan.
Jet fuel costs rose the most for China Southern. The airline, based in the southern economic hub of Guangzhou, said it spent 33 billion yuan ($5.3 billion) on fuel last year, 14.5 percent more than in 2011.
Fuel is the biggest single expense for the airlines. Chinese airlines can do little to keep their fuel bill under control. One reason is that fuel for domestic flights is supplied by a state-owned monopoly, which marks up prices “higher than an otherwise open market would allow,” Barclays analyst Patrick Xu wrote in a report.
Chinese carriers also don’t typically use hedging contracts to lock in part of their fuel bill, like other airlines do, because they lost a lot of money in 2008 using such techniques, Xu added.
The three airlines also reported sharply lower foreign exchange gains as the yuan’s appreciation against the dollar slowed from the year before. Chinese airlines are vulnerable to currency fluctuations because while they mostly earn in yuan, their expenses for fuel and new airplanes are in dollars.
Air China, which said profit dropped 35 percent to 4.6 billion yuan last year, reported a net foreign exchange gain of 124 million yuan, compared with 3 billion yuan in 2011. The other two carriers also reported sharp declines in foreign currency income.
China Southern carried 86.5 million passengers last year, or 7.2 percent more than 2011, but earnings fell by half to 2.6 billion yuan. The airline warned that “demand for short and mid-distance aviation will be further suppressed” as China rapidly expands its high speed rail network. Authorities plan to expand the network to 18,000 kilometers (11,120 miles) by 2015, about double the 9,300 km currently.
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Photo credit: Chairman of Air China Ltd. Wang Changshun attends his companies' annual results announcement in Hong Kong Wednesday, March 27, 2013. China's three major state-owned airlines have posted big drops in annual profit because of the weak global economy, higher jet fuel prices and smaller foreign currency gains. Kin Cheung / AP Photo