Chinese airlines breathed a collective sigh of relief after China allowed its currency to appreciate by 2 per cent last week.

But whether they can return their businesses to the black by the year's end still depends on other factors, especially jet fuel prices, airlines and analysts said.

"The yuan appreciation is definitely good news for us," said Xu Junmin, secretary of the board of Shanghai Airlines.

"If the yuan strengthens by 1 per cent, our earnings per share for the year will increase by 0.03 yuan," Xu told China Daily yesterday.

Xu said the key benefit is that Chinese air carriers will face lower financing costs after the yuan appreciation because a large chunk of their borrowing is in foreign currencies.

Shanghai Airlines has liabilities of about US$400 million. "The yuan move greatly relieves our burden in this regard," Xu said.

"Another good aspect is that the cost of purchasing and leasing aircraft and aviation equipment will also be cut as these transactions are settled in the US dollar," Xu said.

Xu's words were echoed by Liu Jieyin, president of Okay Airways Co, China's first private air carrier.

Okay, which launched its maiden flight in March, leases a Boeing 737 from Korean Airlines.

"Our company will save more than 100,000 yuan every month in leasing fees after the yuan move," Liu told China Daily.

Such benefits, Liu said, are bigger at China's leading airlines, given their larger fleets.

Meanwhile, maintenance and landing fees at foreign airports are also expected to see a "discount" of 2 per cent, said Liu Weimin, director and professor at the Aviation Laws Research Centre affiliated to the Civil Aviation Management Institute of China.

Investors' positive expectations pushed up the price of airline shares the day after China ended the yuan's decade-old peg to the US dollar, allowing the currency to strengthen 2 per cent from its previously fixed rate of about 8.28 yuan per one dollar.

"We have been anxiously waiting for the yuan appreciation," Zeng Zixiang, director of the policy research centre at China Southern airlines, was quoted as saying by China Business newspaper.

However, the small revaluation is not enough to pull some Chinese airlines back into the black, said analysts and air carriers. The key factor will be aviation oil prices in the second half of the year, they said.

Aviation oil accounts for more than 30 per cent of the total costs of Chinese airlines.

"The benefit from the 2 per cent yuan appreciation and from fuel surcharges on air tickets cannot offset surging operating costs created by fuel price hikes in the first half of this year," Xu said.

Aviation oil prices have jumped from 3,400 yuan (US$419.2) per ton early last year to 4,920 yuan (US$606.7) per ton.

The General Administration of Civil Aviation of China (CAAC) and the National Development and Reform Commission recently allowed Chinese air carriers to reintroduce fuel surcharges on domestic routes from next month until the end of the year.

Passengers will have to pay an extra 20 yuan (US$2.47) if they fly less than 800 kilometres and 40 yuan (US$4.9) if they fly more than that.

"The yuan appreciation, in theory, will make China's oil imports cheaper. But how much impact will the small appreciation really have on oil prices? It's still too early to give a conclusion," said Guo Dongmou, an aviation analyst at China Merchants Securities.

Also, the monopoly for jet fuel supplies in China puts Chinese airlines in "a very disadvantaged position" when trying to lower fuel costs, Xu said.

The China Aviation Oil Corp is the only jet fuel provider in the country.

The Chinese airline industry recorded a collective loss of 340 million yuan (US$41.9 million) in the first five months of this year, CAAC statistics show.

Surging jet fuel prices have been blamed for the losses, CAAC Director Yang Yuanyuan said earlier this year at a national work conference. Costs for Chinese airlines soared 3.54 billion yuan (US$436.4 million) during that period because of rising oil prices, he said.

Domestically listed China Southern, Hainan Airlines and China Eastern earlier this month issued profit warnings for the first half of this year. Shanghai Airlines also issued a report about a possible profit fall.

Besides pressure from fuel costs, Chinese air carriers also face challenges from fleet expansion that has speeded up since last year, while market demand lags behind, some analysts said.

But Zeng said, "We should not overestimate the positive effect of the small appreciation of the yuan."

(China Daily 07/28/2005 page9)