The regional slowdown in airline demand is forcing H share China Southern Airlines to cut excess aircraft capacity, contradicting its ambitious fleet expansion plans when it was listed in July. Vice-chairman Yan Zhiqing yesterday said: 'When we were listed, we had not predicted the Asian financial crisis, during which aviation demand has weakened on the mainland and in the region.' Revenues on Southeast Asian routes dropped 75 million yuan (about HK$69.8 million) in the second half, following the devaluation of Southeast Asian currencies and lower passenger load factor. Mr Yan said the airline was discussing leasing out its excess aircraft to domestic and overseas airlines, in addition to the lease expiry of three Boeing aircraft this year. As at the end of March, it had 94 aircraft, including 82 Boeings and 10 Airbuses, compared with 87 in July. Five more Airbuses are due to be delivered in the second half of this year. Mr Yan said the airline this month would announce the acquisition of a domestic airline. On Wednesday, China Southern Airlines announced a 57.2 per cent rise in net profit to 1.14 billion yuan. The figure, substantially higher than its prospectus forecast and market estimates, was inflated by a 143.84 million yuan insurance payout and a 325.78 million yuan foreign exchange gain. The payout was the net amount of insurance compensation after deducting the carrying value of an aircraft that crashed in Shenzhen last May, killing 35 people, and the expenses incurred related to the accident. But discussions over compensation for nine passengers are continuing and payouts will be made by the People's Insurance Co of China. Stripping out the items, net profit from its airline operation would have been 673 million yuan. ING Barings Securities (Hong Kong) analyst Gloria Lu said the airline would manage to post a slight increase in net profit from the operation this year. She said she would revise slightly downward her previous profit forecast of 726 million yuan. 'Domestic aviation demand will remain weak this year and there is no sign of it picking up, because of the overall gloomy economic picture,' Ms Lu said. Mr Yan said domestic passenger flow was hurt after Civil Aviation Administration of China (CAAC) unified fares for local and overseas clients on domestic routes in July, effectively raising the prices. In November, CAAC allowed airlines to offer discounts to attract passengers. 'This year, fares are unlikely to go back to the level after the price unification, but we hope it will be maintained at the level before July,' Mr Yan said. As at December, the airline had borrowings of US$1.87 billion and 49.2 billion yen. Chief financial officer Liu Wenbo estimated each 1 per cent change in the US dollar would have a 150 million yuan impact on profits, and a similar change in the yen would have a 30 million yuan impact. Due to its heavy foreign debt exposure and revenues mainly derived from the mainland, it wanted to expand international routes to offset foreign exchange risks.