By Sijia Jiang, South China Morning Post
China Southern Airlines, Asia's largest carrier by fleet size, on Wednesday reported 2015 profit jumped 117 percent to 3.85 billion yuan (HK$4.61 billion), helped by the plunge in oil prices.
Fuel costs during the period dropped 30.36 percent to 26.27 billion yuan, while revenue only grew 2.91 percent to 111.4 billion yuan. However, a 5.95 billion yuan exchange loss resulting from the weakening yuan helped to counterbalance the profit growth.
The results, on the low end of the company's forecast range, lagged analysts' estimates. The airline would have made more money had there not been a 6.2 percent devaluation of the yuan in the second half of last year, which meant it had to pay more interest on its U.S.-dollar denominated debt. The airline has outstanding debt amounting to 136.7 billion yuan, the bulk of which is denominated in U.S. dollars.
Bocom International analyst Geoffrey Cheng said fuel savings and traffic growth were the key earnings drivers for Chinese airlines last year, while the yuan depreciation was notable in the fourth quarter.
"China Southern is the most exposed to currency risks among its peers and suffered net profit attribution from the yuan depreciation," he said.
The firm incurred a loss of 805 million yuan in the fourth quarter after a best-ever performance in the first half.
The Guangzhou-based airline led among China's Big Three state-owned carriers in aggressively adding capacity on international routes to tap the country's growing outbound travel market. Its international business grew 32 percent last year as measured by revenue passenger kilometres, but net yield declined 10.26 per cent on international routes and 1.96 percent overall, according to the earnings report, meaning the airline was making less money from each flying passenger.
CLSA analyst Rajani Khetan said the rapid international capacity growth of Chinese airlines was "worrying". She believes their yields on international routes will come under pressure this year.
"The pace of accelerated capacity growth on China's international markets in 2016 suggests yield will be under severe pressure. We believe all airlines will see yields fall," Khetan wrote in a note.
But Kom Ajith, director of Asia transport research at UOB Kay Hian in Singapore, said that despite China's slowing economy, there was sufficient outbound travel demand to support the capacity growth.
He also said the market was "overly concerned" about the impact of currency depreciation on the earnings for Chinese airlines as an average decline of US$2 per barrel in jet fuel price could offset the impact of a 1 percent yuan devaluation.
He said the airlines should have more of their fleet on operating lease from aircraft lessors, which would take depreciation of the assets off their balance sheet.
China Southern had 667 planes at the end of last year, a third of which were on lease.