China's big three airlines set to post soaring profits

China Southern Airlines, Air China and China Eastern Airlines forecast to book best set of earnings in years

A China Southern Airlines plane at Ho Chi Minh international airport. The carrier and its two biggest Chinese rivals are likely to report improved earnings this week. Thomas White/Reuters

China’s three largest airlines are likely to report their strongest annual profits in years this week, as soaring travel demand and foreign exchange gains more than make up for a drop in income-per-passenger and the rising cost of fuel.

Analysts estimate China Southern Airlines, the country’s largest carrier by passenger numbers, will report net income on Monday of about 6.4 billion yuan ($1.01 billion), its highest in 11 years as a listed firm, showed data from Thomson Reuters.

Later in the week, Air China is expected to report its biggest profit since 2010, and China Eastern Airlines is forecast to book its best result since at least 1996.

Driving profit is a tourism boom which saw more than 5 billion domestic trips made last year, 12.8 per cent over 2016, plus 129 million overseas trips, up 5.7 per cent, showed data from the China National Tourism Administration.

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Foreign exchange gains are also likely to add "a few billion yuan" to each carrier's earnings, analysts said. The yuan has risen about 10 per cent in value against the US dollar since the start of 2017. This has helped cut the cost of financing aircraft purchases with dollar-denominated loans.

“[Profits] are likely to be very strong,” said Daiwa Securities analyst Kelvin Lau in Hong Kong. “But the major focus will be more on how the yields - especially now with fuel costs coming up - can mitigate cost impact.”

The rate at which the airlines have bought planes and opened less-profitable international routes has outpaced passenger growth, impacting returns. China Southern, for instance, reported a passenger yield of 0.50 yuan per revenue passenger kilometre in 2016, from 0.67 yuan in 2011.

As of June, the three carriers had a combined fleet of owned and leased aircraft of 1,924 planes, from 1,868 at the same time a year earlier. International routes opened last year include Guangzhou-Vientiane and Shanghai-Cebu.

Rising prices of jet fuel, airlines’ single largest cost, is also eating into profits. As of March 16, the price has risen 28 per cent year-on-year to $78.2 per barrel, showed the International Air Transport Association’s jet fuel price monitor.