Airline stocks stay grounded despite oil price slump

Updated: 2014-10-31 07:57

By Sophie He in Hong Kong(HK Edition)

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The oil price plunge in international markets is not expected to benefit the prices of airline shares on the Hong Kong bourse in the short term, stock analysts said.

After a steady buildup of supply and weakening demand, international oil prices have declined by more than 20 percent since June this year. The price of Brent crude, the global benchmark, fell to $82.6 a barrel on Oct 16 - the lowest in almost four years - from $115.71 on June 19.

Airlines are expected to benefit most from falling oil prices, as fuel costs are their largest expense item, accounting for 30 to 40 percent of operation costs, according to a research report released by SWS Research Co on Wednesday.

Jet fuel price is historically closely related to oil price. Weak fuel prices will help domestic airlines save operation costs and increase profits, the report said.

Nevertheless, the prospects of the mainland three major airlines - Air China, China Eastern Airlines and China Southern Airlines - look anything but rosy. Their stock prices didn't see any meaningful increase in the past months, and it's unlikely to happen anytime soon, stock analysts said.

Airline stocks stay grounded despite oil price slump

"Domestic airlines are certainly paying less for fuel, but their share prices are influenced by many other factors," Dickie Wong, executive director of research at Kingston Securities Ltd, told China Daily.

"Airlines' share prices usually reflect their overall operating situations, including passenger load factor, cargos they have carried and financial results," said Wong, adding that the domestic airlines have not had a fantastic time so far this year. The depreciation of the yuan earlier this year didn't help either," he said.

Wong explained that domestic airlines' interest-bearing liabilities are usually dollar-denominated while their assets are yuan-denominated. For that reason, a weaker yuan against the US dollar will result in exchange losses for domestic airlines, he said.

China Eastern Airlines, which reported its financial results for the third quarter of 2014 on Wednesday, posted a 26.7 percent decline in profit from the same period a year earlier to 2.04 billion yuan ($333.5 million). Its revenue during the period was 26.14 billion yuan - up 2 percent.

But analysts are expecting domestic airlines to fare better next year.

According to a research report by China Galaxy Securities Research, every 10 percent drop in the fuel price can be translated into a saving of between 3 billion yuan and 3.5 billion yuan for carriers. Meanwhile, economists are foreseeing a two percent appreciation of the yuan against the US dollar from mid-2014 to mid-2015.

"We believe that as the crude oil price is still trending lower, the exchange gain will have a notable positive effect on domestic airlines' financial results for the first half of 2015. We expect domestic airlines to see positive profit growth in the first half 2015," the China Galaxy report said.

 Airline stocks stay grounded despite oil price slump

espite favorable exchange rates and a drop in jet fuel prices, share prices of airline companies have changed little as the companies' operation strategies and methods remain the biggest concern among investors. AFP

(HK Edition 10/31/2014 page5)