Weaker Yuan Hurting Chinese Airlines

 - April 16, 2014, 11:17 AM
China Southern took delivery of its first Boeing 777-300ER on February 25. (Photo: Boeing)

As the U.S. expressed “concern” on Tuesday over the devaluation of China’s currency, making its exports cheaper but reducing the buying power of Chinese consumers, Chinese airlines continued to feel the pain of a weaker yuan as the value of their foreign debt rose with the relative strengthening of the U.S. dollar. China Southern Airlines, for one, on Tuesday issued a profit warning report estimating a first-quarter net loss resulting from downward foreign exchange fluctuations. China’s largest airline by revenue said it would likely lose between 300 million yuan ($48.55 million) and 350 million yuan ($56.65 million) during the period, compared with a net profit of 57 million yuan ($9.22 million) during last year’s first quarter.

In its semiannual report to Congress on international economic and exchange rate policies, the U.S. Treasury Department said that progress on rebalancing global demand remains inadequate, and that the recent developments involving the yuan’s exchange rate “would raise particularly serious concerns if they presage renewed resistance to currency appreciation and a retreat from China’s announced policy of reducing intervention and allowing the exchange rate to reflect market forces.”

“The Treasury Department will continue to carefully monitor China’s exchange rate regime and the path of China’s currency and will press for further policy changes consistent with market determination of the exchange rate and transparency with respect to intervention,” it said in a written statement.

Any manipulation of China’s currency to prevent it from gaining value would seem counterproductive to the country’s efforts to strengthen its air transport sector, however. Over the past decade the country’s airlines enjoyed an unprecedented period of growth, and last year’s currency appreciation resulted in a particularly strong year in terms of profitability. Foreign exchange gains contributed 2.903 billion yuan ($470 million) to China Southern’s profits last year, compared with a positive effect amounting to 267 million yuan ($43.21 million) in 2012.     

Notwithstanding what it considered progress in China last year, when the country widened the band within which it would allow its currency to move relative to the U.S. dollar, the U.S. Treasury Department called the action “not as fast or as much as is needed.” Last year the yuan gained 2.8 percent against the dollar, but it has fallen by the same amount so far this year.