China’s top airlines say profits fell sharply in 2012

China’s three major state-owned airlines reported steep drops in annual profit last year, citing the weak global economy, higher jet fuel prices and smaller foreign currency gains.

China Southern, the country’s largest carrier, said Wednesday that last year’s profit was about 50% lower than the previous year, the Associated Press reported. Rivals Air China and China Eastern reported earnings were about one-third lower.

“Demand in the aviation industry in 2012 continued to be weak as a result of the slow recovery of the U.S. economy, the ongoing European debt crisis and the global recession,” Beijing-based Air China said. “Escalating operating costs from high jet fuel price and the intensifying competition added to the challenges faced by the industry.”

Shanghai-based China Eastern said its profit fell 35% to 2.95 billion yuan, or $474 million.

Jet fuel costs rose the most for China Southern. The airline, based in the southern economic hub of Guangzhou, said it spent 33 billion yuan ($5.3 billion) on fuel last year, 14.5% more than in 2011.

Fuel is the biggest single expense for Chinese airlines, and they can’t do much to reduce those expenses. Fuel for domestic flights is supplied by a state-owned monopoly, which marks up prices “higher than an otherwise open market would allow,” Barclays analyst Patrick Xu wrote in a report.

Chinese carriers also don’t typically use hedging contracts to lock in part of their fuel bill, as other airlines do, because they lost a lot of money in 2008 using such techniques, Xu added.

The three airlines also reported sharply lower foreign exchange gains as the yuan’s appreciation against the dollar slowed from the year before. Chinese airlines are vulnerable to currency fluctuations because while they mostly earn in yuan, their expenses for fuel and new airplanes are in dollars.

Air China said its profit dropped 35% to 4.6 billion yuan ($739 million) last year. The carrier said its net foreign exchange gain was 124 million yuan ($20 million), a fraction of the 3 billion yuan ($482 million) it made from foreign exchange in 2011. The other two carriers also reported sharp declines in foreign currency income.

China Southern carried 86.5 million passengers last year, or 7.2% more than 2011, but earnings fell by half. The airline warned that “demand for short and mid-distance aviation will be further suppressed” as China rapidly expands its high speed rail network. Authorities plan to expand the network to 18,000 kilometers (11,120 miles) by 2015, about double the current line.

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