17 April 2018, Asia Pacific – Most Asian currencies have strengthened significantly against the US dollar year-on-year. This will be a positive driver for the Asia Pacific airlines’ financial performance this year as they have more USD-denominated costs than USD-denominated revenue. Moreover, their aircraft capex is also paid in USD and often financed with USD debt or USD leases.
Chart: Most Asian currencies have strengthened significantly against the US dollar year-on-year (2018)
Weaker US dollar reduces fuel costs and aircraft capex payments and boosts forex gains
In addition, as the Asia Pacific airlines tend to fund their capex with a sizeable level of USD debt, this results in unrealized foreign exchange translation gains (losses) that the airlines are required to mark to market and book in their financial statements at the end of each reporting period when their local currencies strengthen (weaken) against the US dollar.
For leveraged airlines with high US dollar debt levels, this forex gain (loss) can be disproportionately larger than their recurring earnings impact from the weaker (stronger) US dollar. Although it is a non-cash item and could potentially reverse if the local currency rebounds against the US dollar in the future, the stock market tends to react positively (negatively) to Asia Pacific airline stocks when their local currencies strengthen (weaken) against the US dollar.
Nok Air, Air China, AirAsia, Jeju Air and AirAsia X – best performing stocks when their local currencies strengthen against the US dollar
Among the Asia Pacific airline stocks whose home currencies have strengthened significantly against the US dollar, Nok Air (NOK:TB), Air China (753:HK), AirAsia (AIRA:MK), Jeju Air (089590:KS) and AirAsia X (AAX:MK) have the strongest positive share price correlation with the strength of their local currencies based on our correlation analysis of their daily market price movements for the past 5 years.
The share price performance of Indigo (INDIGO:IN) and Cebu Air (CEB:PM) also have significant positive correlations with their local currencies and could therefore be hurt by the weaker Indian rupee and Philippines peso against the US dollar.
Chart: Asia Pacific airlines share price performance correlation with the strength of their local currencies (2013 to 2018)
Japanese airline stocks tend not to perform well when the Japanese yen strengthens
By contrast, the share prices of Singapore Airlines (SIA:SP) and the domestically listed Chinese carriers (including Hainan Airlines 600221:CH, Spring Airlines 601021:CH, Juneyao Airlines 603885:CH) do not have any meaningful correlation with the Singapore dollar and Chinese renminbi movements respectively based on our correlation analysis of their daily price movements for the past 5 years.
Interestingly, the Japanese airlines ANA Holdings (9202:JP) and Japan Airlines’ (9201:JP) share price performance are negatively correlated with the Japanese yen which seems counter-intuitive since they are also short of US dollars. This could be due to market expectations of reduced inbound tourism traffic due to the stronger yen. Therefore, their share prices may not perform well if the Japanese yen strengthens further.
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