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Chinese airline earnings might begin to descent next year

12/12/2016| 6:47:19 PM|

A triple threat of lower yields, higher fuel prices and yuan depreciation are expected to see Chinese airlines’ earnings slip next year, analysts say.

A triple threat of lower yields, higher fuel prices and yuan depreciation are expected to see Chinese airlines’ earnings slip next year, analysts say.

Aviation fuel is the largest cost item for airlines, accounting for up to 22 per cent of operating costs for the first half of this year.

HSBC forecasted that the major airlines will see declines in profits next year due to foreign exchange loses and falling passenger yields.

Air China, for instance, is expected to see a 40 per cent drop in net profit in 2017 on year, while China Eastern Airways is expected to see a 17 per cent slide in net profit, and China Southern Airways will see a 55 per cent plunge.

A further challenge for the airlines is the depreciating yuan, which HSBC forecasts will drop to RMB 7.2 per US dollar by the end of next year, adding up to an enlarged burden for holders of US-dollar denominated debt.

On the positive side, in October, the Civil Aviation Administration of China released a new list of routes that are eligible for ticket price adjustments.

HSBC said it favoured the Hong Kong-listed shares of China Eastern Airlines among state owned carriers because of its high market share of domestic trunk routes.

HSBC noted that Air China would face headwinds from Cathay Pacific, in which it owns a 30 per cent. 

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