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Asia’s Biggest Airline Had a Weak Start This Year, But It’s Banking on Expansion

Aug 07, 2014 6:00 am

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The New York route will go a long way to getting China Southern a little name recognition in the North American market.

— Jason Clampet

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Arrival Hall in Beijing Capital International Airport. Matt @ PEK / Flickr


China Southern Airlines Co., Asia’s biggest carrier by passengers, forecasts a better second half after a loss in the first six months as economic growth picks up and the yuan’s volatility eases, Chairman Si Xianmin said.

The company’s American depositary receipts rose 1.1 percent yesterday in New York to a five-month high, paring this year’s slump to 11 percent. The Bloomberg China-US Equity Index slipped 0.5 percent to 112.14, the lowest level in two weeks.

China Southern, which is the most reliant on the domestic market among the nation’s biggest carriers, is accelerating its overseas expansion to help improve its “unbalanced” network structure, Si said. The carrier started yesterday a Guangzhou-to-New York route. The airline incurred a loss in the first half, the chairman said, confirming a forecast issued last month, as a 2.4 percent depreciation in the yuan eroded industry profits while a slowdown in Asia’s biggest economy cut traffic.

“We’ve seen a loss in the first half mainly because the economic slowdown has caused growth in the aviation market to slow,” Si said in an interview with reporters yesterday in New York. “We forecast our second-half performance will surely be better than the first half. We don’t foresee big volatility in the foreign exchange rate of the yuan versus the dollar in the second half.”

China Southern’s ADRs rose to $17.65, the highest price since Feb. 20. The stock has rallied 18 percent since the end of June as the yuan has strengthened 0.6 percent versus the dollar, while the country’s manufacturing expanded in July at the fastest pace in more than two years.

Ticket Sales

Ticket sales for the new route linking China Southern’s home hub of Guangzhou to New York shows a load factor, or seat occupancy rate of more than 80 percent in both directions, according to Si. This is the company’s third direct flight to North America after Los Angeles and Vancouver. China Southern started flights from Wuhan to Moscow on July 30, the first direct route linking central China with Russia, according to a release on its website.

Revenue from major international flights have “obviously” increased this year, Si said, adding the airline aims to increase its investments on overseas markets to more than 30 percent of total spending, from a current level of about 27 percent.

International flights accounted for 16.8 percent of China Southern’s total passenger revenue last year, compared with 80.7 percent for domestic flights, according to the carrier’s 2013 annual report. The company’s fleet, Asia’s biggest, will rise to more than 600 aircraft by the end of August, Si said.

‘Prudent’ Principles

The airline said in a statement to the Hong Kong stock exchange July 11 that it may incur a loss of as much as 1.1 billion yuan ($178 million) in the first six months this year, compared with a 302 million yuan profit in the year-earlier period.

While China Southern is “actively” studying the possibility of entering the low-fare segment of the domestic market, it will follow “prudent” principles in terms of timing, Si said, adding the nation is still in the early stage of developing low-cost flights and the growth pace isn’t fast. China Eastern Airlines Corp., the nation’s third-largest carrier by revenue, set up its first low-fare carrier in the country in July.

The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., dropped 0.6 percent to $40.21, falling for a second day.

The Hang Seng China Enterprises Index fell 0.3 percent to 10,979.93, the lowest since July 24. The Shanghai Composite Index slipped 0.1 percent to 2,217.47 in a second day of drops.

With assistance from Clement Tan in Hong Kong.

To contact the reporter on this story: Belinda Cao in New York at lcao4@bloomberg.net. To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net.

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