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Business

China Eastern Airlines expands yuan financing to ease forex pain

Ma Xulun, center, China Eastern Airlines’ vice chairman and CEO, announces the carrier’s 2015 results on April 1.

HONG KONG -- China Eastern Airlines aims to further slash its dollar-denominated debt this year to shield earnings from a weaker yuan.

     The state-owned, Shanghai-based airline said on Friday it had lowered its ratio of dollar debt to 50% as of the end of March, down from 81% in 2014. It said it would borrow yuan to finance aircraft purchases, aiming to keep the ratio of yuan and foreign currency debt at 50-50 this year.

     The company saw an urgent need to change its liability structure, with a weaker yuan eating into Chinese airlines' gains from plunging oil prices.

     China's big three state-owned airlines were hit by a combined exchange loss of nearly $3 billion last year. Flag carrier Air China, which booked an 83% rise in net profit to 7.1 billion yuan ($1.09 billion), said on Thursday that it hopes to lower its dollar debt ratio to about 60% this year.

     Guangzhou-based China Southern Airlines, whose net profit almost doubled to 3.7 billion yuan, intends to lower it to half.

     China Eastern saw its exchange loss jump by a multiple of 25 to 5 billion yuan last year, when the Chinese currency lost nearly 4% after a sharp devaluation by the central bank in August.

     Still, the carrier's full-year net profit rose 33% to 4.5 billion yuan, buoyed by low fuel prices. Revenue was up 4% to 94 billion yuan in the 12 months ended in December. The airline's fuel bill, which accounts for a quarter of its operating costs, fell 32.8% on the year to 20.3 billion yuan.

     "We will take advantage of the lower oil price environment and China's growing outbound tourism to speed up our internationalization progress," Ma Xulun, China Eastern's vice chairman and CEO, told reporters on Friday. He added that the scheduled opening of Shanghai Disneyland in June is likely to boost business.

     Ma said the carrier will expand its international capacity by 20% this year, while bumping up domestic capacity by 10%. By 2020, international capacity is expected to account for 50% of the total, up from one-third now, he said. New routes between Shanghai and European capitals -- including Prague, Amsterdam and Madrid -- are slated to launch in late June.

Don't count on Mickey

Analysts, though, are not convinced that Shanghai Disneyland will have a big impact on the airline. "We see Disneyland only boosting sentiment toward the stock, not its financials," said Kelvin Lau, an analyst at Daiwa Capital Markets. He said the park's opening will bring an additional 375,000 passengers per year, which is "minimal" compared with the total number of passengers the airline carries.

     Commenting on the three airlines' earnings performance, Lau expects their plans to boost international capacity will continue to squeeze yields. Their current valuations, however, have been "attractive for bottom-fishing on stocks like Air China" thanks to the recent stabilization of the yuan, he added. 

     China Eastern shares closed 1.61% higher at HK$4.42 on Friday, outperforming the Hang Seng Index's 1.34% loss.

     Unlike overseas rivals such as Singapore Airlines and Hong Kong-based Cathay Pacific Airways, China's three state-owned airlines do not typically hedge against fluctuations in fuel prices.

     But China Eastern said it would have about 10% -- some 600,000 tons of its fuel -- hedged against futures contracts or options on futures. Chief Financial Officer Wu Yongliang would "not rule out" joint hedging by the big three, while noting that oil prices should remain around $40 a barrel in the short run. 

     China Eastern also said it would consider paying a dividend after the completion of its 15 billion yuan A-share private offering in the middle of the year, with a payout ratio of at least 40%. The company has paid dividends twice since it listed in Hong Kong in 1997; the last time was in 2005.

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