Chinese Airlines Suffer Significant Forex Losses Due to High Fuel Costs

The latest report is that Air China Ltd. is the new victim of rising fuel costs. In the reports published on Tuesday, the Chinese carrier reported to suffer huge foreign-exchange losses and its net profit dropped by 77% in the first-half. Besides higher fuel costs, a sharp decrease in demand of air travelers has been held responsible for this loss.

In recent years, the state-owned airlines in China have been reported better revenue than the international carriers. The Chinese government has been extending financial support to help grow the domestic air carriers and the domestic air travel has been on the rise adding to the profits of the state-owned carriers in China.

However, experts feel that the number of Chinese domestic air travelers is growing in moderate numbers and this could be a significant reason why Chinese domestic carriers may fail to generate revenue without the government support. And the competition amongst the airlines is also intensifying day by day. The depreciation of the Chinese currency Yuan is also affecting their growth and majority of the Chinese airlines are suffering Forex losses.

In China, Air China, China Southern Airlines Co. and China Eastern Airlines Corp. are the three important state-owned airlines. In July this year, these three carriers had warned their investors that their net profit would likely to fall in the first half.

They had projected a fall of 50% and above and this adequately points out how Chinese carriers are losing their financial strength. On Tuesday, Air China revealed its net profit for six months ending June 30, 2012, which stood at 944.5 million Yuan (USD148.6 million). This figure was much lower than the 4.06 billion Yuan that they had recorded a year earlier. The Chinese carrier also revealed a foreign-exchange loss of more than 300 million Yuan. Earlier last year, the carrier had reported a Forex gain of 1.48 billion Yuan.

This Forex loss reported in the first half has been attributed to the depreciation of the Yuan against the US dollar. In the first half this year, the Chinese currency Yuan reported a depreciation of 1% against the US dollar. However, last year it had recorded a rise of 4.7% against the dollar. This shows how Yuan’s rise and fall against the dollar determines the profit level of the Chinese carriers.

Another Chinese carrier China Southern reported a significant foreign-exchange loss on Monday. Like Air China, China Southern also reported a loss of over 300 million Yuan in the first half of 2012, which accounts for a 85% decrease in the net profit reported a year ago. The airline had reported a gain of 1.2 billion Yuan last year.

China Eastern is also expected to reveal its first-half net profits very soon and sources say the figures won’t be encouraging either.

In China, the fuel costs account for almost 50% of the total operating costs. In such a scenario, the growing fuel cost is certainly a matter of great concern for the Chinese carriers. Moreover, the diminishing Yuan value with respect to the US dollar is causing the depletion of the Forex reserve that these Chinese airlines have amassed over the years.

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