The carrier posted a 2008 net loss of 4.8 billion yuan (US$703 million) after natural disasters disrupted flights and the slowing global economy depressed passenger and cargo volumes.
Cargo volumes fell 18.5 per cent to 159,120 tonnes in the first quarter 2009 compared to a year earlier. Last year, the Guangzhou-based airline’s passenger numbers rose 2.3 percent to 58.2 million, or 31 per cent of the nation’s total.
The carrier avoided a move substantial loss because of less fuel hedging exposure, compared to other Chinese carriers. Aside from closing all of its hedging positions in September, the airline also hedged less fuel than its rivals because of its greater reliance on domestic routes. Chinese airlines are unable to hedge purchases for internal services because of government pricecontrols.
China Southern will also save US$1 billion this year by delaying deliveries of Airbus A380s and Boeing B787s. China Southern, the nation’s only A380 customer.
The 13 787s and five A380s will now arrive from 2011, Board Secretary Xie Bing said recently. The carrier is also in talks to postpone four Boeing 777 freighters due this year, said chief financialofficer Xu Jiebo.
Expansion plans
China Southern’s parent has also won a 3 billion yuan bailout from the government to help pare debts and to back its plans, the Guangzhou-based airline has secured approval from the central government to lease six aircraft this year.
The airline will sell and lease back the six aircraft from an international leasing company this year to improve its fi nancial structure, company secretary Xie Bin said.
“The airline group, including affiliate Xiamen Airlines, would take delivery of 46 aircraft this year,” he said.
To further strengthen its financial position, China Southern also plans to sell 12 McDonnell Douglas MD82 aircraft and four Boeing 777-200s.
China Southern said the impairment losses of the aircraft to be displaced this year would have a negative impact on results, but it would not affect its operations as the losses were non-cash item.
The airline has also established a new strategic cooperation agreement and capital settlement network cooperation agreement with China Construction Bank. As part of the new pact, China Construction Bank will provide a 20 billion yuan (US$2.92 billion) comprehensive line of credit to the Chinese carrier.
The new agreement with China Construction Bank will, “carry out multi-level and all-dimensional cooperation in the field of credit aid; financial consultation; international settlement; cash management; capital settlement; construction consulting and company pension”, a China Southern spokesman said.
Service expansion
Effective 29 March China Southern started services from Beijing to Seoul, Chongqing, Hangzhou, Kunming, Xining and from Guangzhou to Shanghai. The carrier plans to deploy aircraft in March, and will continue to do so in May, June and July, raising the number of aircraft operated by China Southern’sBeijing branch to 13. The aircraft include two A300-200s, four A330-300s andseven A321s.
On international routes, China Southern will deploy both A330-200/300 aircraft and use A321 aircraft on Beijing- Seoul, Beijing-Hong Kong and Beijing- Guangzhou-Phnom Penh routes and A330-200/300s on Beijing-Dubai-Lagos service.
China Southern is also adding a new daily service from Xian to Hangzhou. In addition, the airline will also put on extra flights on the existing four routes between Zhengzhou-Chengdu, Zhengzhou, Nanjing and Xiamen, Zhengzhou, Nanjing and Fuzhou and Zhengzhou, Wuyishan and Xiamen.
In addition, China Southern is also expanding its operations through a code sharing deal on Aeroflot Russian Airlines’ three Moscow-Guangzhou f ights per week starting from June 3, 2009. This is the second cooperative code sharing flight for the two airlines following their cooperation on the Urumqi-Moscow air route in October 26, 2008.
“The airline expects to face difficulty returning to profitability this year, as the industry struggles with weak demand due to the global slowdown,” said China Southern chairman Si Xianmin.
Although the airline recorded a net loss of US$705 million in 2008 due to weak demand, cost pressure from high domestic oil prices and impairment losses on its fixed assets. China Southern is expected to benefit from the government’s stimulus plan which has boosted air transport demand in the last quarter.
“(Chinese) airlines and airports may have made a combined profit of 800 million yuan to one billion yuan in the first quarter,” Li Jiaxiang, director of Civil Aviation Administration of China, said. That compares with a loss of 28 billion yuan last year, he added.
Wuhan acquisition According to China Southern, it is in discussions with China Eastern Airlines to buy the latter’s loss-making branch company in Wuhan, capital city of central China’s Hubei province.
China Eastern’s Wuhan branch incurred loss of 1.6 billion yuan in 2008, the largest loss among its branch countries.
China Southern’s market share of the business in Wuhan is double that of China Eastern. China Eastern aims to cut its Wuhan business to ease current financial difficulties.
Joint venture
According to a French media report, China Southern Airlines is in discussions with Air France to set up a joint-venture air cargo company, but the Chinese airline declined comment.
It was reported that the two parties hope to co-build a joint-venture air cargo company. But the agreement failed to be reached in this January as it was earlier expected, due to slow progress of the negotiations.
The two parties are currently taking a prudent attitude on restructuring the cargo business of their own carriers and expect to set up the joint-venture company later this year.
With the ongoing weakness in the global aviation market continuing to be dragged down by the sluggish global economy, market observers question what benefits a new joint-venture cargo company will bring to China Southern.