Airlines to take direct hit from rising price of oil

Chinese airlines are expected to bear the brunt of rising oil prices after OPEC came to an agreement to limit production. In response, the airlines are likely to levy fuel surcharges on domestic and international flights, experts said.

On Nov 30, OPEC reached a consensus on production cuts to ease excess global inventory, triggering a jump in oil prices.

"The oil price rise will have a negative effect on domestic airlines. Airlines have very weak abilities to resist the fluctuations of oil prices, and it will be a challenge to their business growth," says Li Xiaojin, a professor of aviation economics at the Civil Aviation University of China in Tianjin.

"Airlines should take some steps to hedge against the risks. They can prepare to levy a fuel surcharge on passengers and take other measures to reduce oil consumption, as the impact is likely to be long-term," Li says.

Since February 2015, all domestic airlines have stopped levying fuel surcharges, as a result of the cost declines of fuel procurement.

Li says that in the near future, oil prices are unlikely to surge further or drop significantly. Passengers may consider the total cost of flying, and some are likely to choose trains instead on some routes to save money.

Meanwhile, Chinese airlines are also suffering the pain of a weakening yuan. In November, the yuan depreciated steadily against the dollar, beyond market expectations. That depreciation will cause exchange losses for domestic airlines.

In the first half of this year, major domestic airlines, including Air China, China Eastern and China Southern, all recorded foreign exchange losses of another 1 billion yuan year-on-year - nearly half of their net profits in the first half, according to their earnings reports.

"The yuan is likely to stay weak against the dollar for awhile. Airlines need to adjust their liability compositions, speed up the repayment of dollar debts, and take other steps such as issuing bonds in yuan and loans in multiple currencies," said Su Baoliang, an analyst at Sinolink Securities Co.

zhuwenqian@chinadaily.com.cn

(China Daily Africa Weekly 12/09/2016 page30)