China Southern Airlines, the country's largest domestic carrier, has reported a 32.2 per cent year-on-year fall in net profit for last year to 340.22 million yuan (about HK$321.5 million), due to falling ticket prices and a lack of income from aircraft sales. The profit was lower than the market forecast of 400 million yuan, according to the consensus of 21 brokerages polled by Multex Global Estimates. The decline was despite a 11.2 per cent rise in turnover to 16.88 billion yuan and strong traffic growth, implying an erosion in profit margin due to sharp ticket discounting. Operating profit fell 14.2 per cent to 1.68 billion yuan. Detailed operating data will not be available until Monday. In the first half last year, China Southern reported a 42 per cent year-on-year fall in net profit to 201.49 million yuan. According to DBS Vickers Securities, China Southern last year saw a 16.1 per cent rise in passenger traffic and 18 per cent growth in air freight movement. Overall passenger seat occupancy increased from 60.4 per cent to 62.8 per cent, the brokerage said in a research report. Analysts said a lack of profit from aircraft sales was also a major factor in China Southern's profit drop last year. It is believed to have booked a profit from aircraft sales of 18 million yuan last year, the same profit booked in the first half, and compared with 372.59 million yuan in 2000. Nomura International analyst Pierre Lau estimated China Southern booked a foreign exchange gain of 285 million yuan, down from 319 million yuan in 2000. The gains arose from the depreciation of the yen, in which most of the company's loans are denominated. China Southern and fellow carrier China Eastern Airlines have booked huge exceptional gains, foreign exchange gains and profit from disposal of aircraft in the past two years. China Eastern unveiled early this week a 208.61 per cent rise in net profit to 541.71 million yuan for last year, of which 306.42 million yuan was a tax credit and 95.97 million yuan a retirement benefit obligation write-back. It booked a foreign exchange gain of 126 million yuan last year, and 120 million yuan in 2000. Analysts expect a gradual improvement in core profitability for both carriers, as the Beijing-ordered industry consolidation will help them gain operating scale and reduce competition. The consolidation will see 10 Civil Aviation Administration of China administered airlines merge into three giant groups - led by China Southern, China Eastern and Air China. 'Ticket prices and capacity utilisation will improve over time as the smaller operators are merged into the bigger ones,' Mr Lau said. China Eastern has taken over Great Wall Airlines and bought a 40 per cent stake in Wuhan Airlines. China Eastern is in talks to take a stake in Sichuan Airlines. Other merger targets include Shenzhen Airlines and Shanghai Airlines. Analysts said China Eastern was seen as more aggressive in making acquisitions than China Southern. They cited market talk that China Southern had offered to buy a controlling stake in Wuhan Airlines, but Wuhan opted to join the China Eastern camp as it agreed to take a non-controlling stake. China Southern recommended a final dividend of two fen per share. Earnings per share for the year was 10 fen.