China Southern Airlines is betting yuan appreciation and an expansion in fleet capacity will sustain last year's rosy results, but escalating oil prices threaten to erode profits.
Jet fuel costs rose 43.4 per cent to 23.49 billion yuan (HK$27.92 billion) last year, making up almost 40 per cent of the company's operating expenses, although the company managed to pass more than 75 per cent of the extra costs on to passengers.
Director Xu Jiebo said the airline would consider whether to renew the practice of hedging oil prices for the return trips of its international routes.
'The year-on-year surge in jet fuel prices was particularly high in the first two months of this year,' Xu said. 'Many airlines suffered losses when they hedged fuel prices in 2008. If we do it now, we will restrict the period to within 12 months.'
The airline used between 350,000 and 400,000 tonnes of fuel on its international routes, which made up about 13 per cent of its passenger revenue last year.
President and chief executive Tan Wangeng said the contributions of international routes to earnings would more than double to about 30 per cent in the coming year.
The carrier's net profit soared 17-fold last year to 5.8 billion yuan while operating revenue leapt 40 per cent to 76.5 billion yuan, backed by economic growth, major events such as the Shanghai World Expo and a net exchange gain of 1.75 billion yuan from the yuan's appreciation against the US dollar.
More than 90 per cent of China Southern's debt is dollar-denominated from the purchase of Boeing and Airbus planes.
Xu said for every 1 per cent rise in the yuan the firm would gain 400 million yuan in earnings. Analysts at Nomura International expect the yuan to rise 5.6 per cent this year.
China Southern will spend 24 billion yuan this year to buy 39 aircraft, including six cargo freighters. Chairman Si Xianmin said the addition could only boost capacity about 10 per cent this year as most of the planes would be delivered in the second half, including the mainland's first A380 that will arrive in August.
With a capacity of 550 passengers, the world's largest aircraft is expected to serve international routes between Beijing and major cities.
Total passenger numbers rose 15.4 per cent to 76.46 million last year, while passenger aircraft were almost 80 per cent full on average, a jump of 5.2 per cent over the previous year.
Tan expected the recent nuclear crisis in Japan would have little impact on the airline's business. Although passenger loading of flights to Japan has dropped about 11 per cent, it was compensated by a surge in passengers returning from Japan. Services to Japan made up just about 3 per cent of the airline's income.
Separately, Xi called a new cap passed by the European Union on aviation emissions as 'unacceptable, unjust and unfair'. The new legislation would penalise any airline entering EU countries' airspace if they failed to meet the new emission standard next year, which is set at 97 per cent of the average annual emissions between 2004 and 2006.
Economic growth, major events and a rising yuan led to a 17-fold increase in China Southern Airlines' net profit, in yuan, to: 5.8b yuan