China Eastern Airlines

Ailing China Southern to get 2b yuan injection

PUBLISHED : Monday, 11 June, 2012, 12:00am
UPDATED : Monday, 11 June, 2012, 12:00am

Another government handout may not do much to help a beleaguered China Southern as capital injection is a doubled-edged sword for airlines, industry analysts say.

In yet another capital boost into China Southern, which received 3 billion yuan (HK$3.6 billion) in 2009 and a further 1.5 billion in 2010, the Guangzhou-based carrier is to announce the third round of government subsidy today.

The fresh injection, which, sources say, could be around 2 billion yuan, is likely to be used to lower the airline's debt level. China Southern's debt ratio stands at over 70 per cent, compared with 50 to 60 per cent for its peers worldwide.

The management says the handout is an expression of Beijing's support for the aviation industry. The central government provides subsidies to state-owned firms, from steel to telecommunications, as a matter of course, but few of these companies have to compete with international peers as fiercely as airlines do. And often the handouts make airlines less cost-conscious and competitive than those forced to adapt to the market to stay afloat.

The timing of this round of capital injection is interesting, however. Unlike in 2009, when airlines across the globe were reeling from the financial crisis, mainland airlines seem better protected from economic turbulence than those in the West. In the first quarter, the big three carriers - Air China, China Southern and China Eastern - were profitable while international carriers were being battered.

But mainland carriers look poised to suffer from capacity oversupply in the near future, said Karen Chan, an analyst at RCM. Oversupply is partly due to new airplanes ordered by the airlines while the funding is from the central government.

Over the past three years, the big three carriers have received approximately 15 billion yuan in capital injection from the central government.