China Southern profit warning; AirAsia X sale and leaseback; and fuel hedging

Dino D'Amore
By Dino D'Amore April 16, 2014 20:46

China Southern profit warning; AirAsia X sale and leaseback; and fuel hedging

At Airline Economics Growth Frontiers conferences in Hong Kong and Dublin, we have been very careful to ensure that a great deal of time is turned over to macro-economic detail along with fuel hedging and FX mitigation slots and well we should for the outlook remains mixed at best for APAC majors.

In a filing to the Hong Kong Stock Exchange China Southern Airlines, the country’s largest carrier by fleet size, said that it would lose 300-350 million yuan ($48.2-$56.3 million) in January-March. That compares with a net profit of 57 million yuan in the same period last year after it was hit by currency exchange losses caused by the weaker yuan.

“The financial expenses of the company substantially increased as compared with the corresponding period of 2013 due to the exchange losses… resulting from the substantial depreciation of renminbi,” states the airline.

The recent lows for the Yuan against the US Dollar are the result of Beijing moving to weaken the currency to “control speculative funds”, but the reality is far more likely to be the need to stimulate manufacturing output, something China will deny – much to the disgust of the rest of the world that was hoping for a free-floating Yuan. We here reported this was coming back in November 2013 so airline profit warnings should not come as a shock to readers.

Given the amount of aircraft on order and the need for ongoing maintenance the Chinese airlines are very heavily exposed to the US Dollar.

China Southern’s Hong Kong-listed shares were down 1.62% at HK$2.43 while the benchmark Hang Seng was up 0.63%.

Currency movements are not the only worry. Fuel is the ever present major cost of any airline and this year thus far has been a good one for fixing hedges. Brent crude has averaged US$108 a barrel against 2013’s average of US$109, and jet fuel has averaged US$121.20 this year compared to US$126.62 a barrel last year and USD$125.95 in 2012. We are in a period right now that could be considered a fuel price dip, and so it is a good time to fix prices in for the months ahead, especially so given the Ukraine crisis risk to global prices.

Cathay Pacific Airways fixed prices in during a low point in 2013 and has fuel fixed at $94.5 a barrel for 25% of fuel requirement in 2014 and H1 2015. SIA is the biggest hedger with 60% of requirements hedged for H2 2014 at US$118 a barrel. Japan Airlines is hedging about 40% of its fuel requirements during the 2014 financial year while ANA’s hedge ratio for its 2014 financial year is 45%. Korean Air Lines generally keeps its hedging volumes around 30%, all these airlines have a long term policy and these percentages are static on the previous years. But what of those other airlines that were burned by fuel hedges in 2008/09? It looks like they are being forced back to the market.

In other news, it is possible that AirAsia X may well be getting a fillip from the MAS problems. AirAsia X will seek to minimize capex in 2014 through sale and leaseback on three A330s which will yield a gain of US$5m to US$8m per aircraft in the short term and they expect the leases to be in the US$900k a month for each aircraft. One of the four aircraft to be delivered to AirAsia X this year will be wet-leased to a third-party airline, which means they feel they will have trouble filling the same. Even so this avoids finance-lease agreements and will improve the balance sheet. Going forward AirAsia X is pinning a great deal of hope on ticketing GDS systems from this month and releasing tickets through OTA by mid-2014. AirAsia X will display all possible route pairs on these systems, to increase its market share of point to point traffic between north-east Asia and Australia from 14% to 20% by year end.

AirAsia X is targeting a 2 percentage points increase in load factors, keeping yields flat, raising RASK by 2% on-year and expanding its EBIT margins.

Dino D'Amore
By Dino D'Amore April 16, 2014 20:46
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