China Southern Airlines

China Southern sees yields still falling; American Airlines deal boosts US flights

Asia’s biggest carrier says it will offer 10 direct flights to the US initially, under a new code-sharing agreement with American Airlines

PUBLISHED : Wednesday, 05 April, 2017, 9:39pm
UPDATED : Wednesday, 05 April, 2017, 11:01pm

Passenger yields on international routes will remain in decline this year because of fierce competition in the aviation sector, according to Asia’s largest carrier, China Southern Airlines.

Luo Laijun, acting director of the airline’s commercial steering committee made the gloomy prediction on Wednesday when the carrier announced an increase in flights to the US under a code-sharing arrangement with American Airlines, its new minority shareholder.

“We will operate more non-stop flights to the US as part of our cooperation with American Airlines,” said Wang Changshun, the chairman of China Southern. He said this would start with 10 flights in a code-sharing agreement, in which the two airlines will share the same flights.

The Guangzhou-based airline announced last week that it would issue 270.6 million shares valued at HK$1.55 billion (US$200 million), or HK$5.74 apiece, to American Airlines Group, giving the US’ biggest carrier 8.83 per cent of the enlarged number of its H-shares.

“We think that a strategic cooperation with American Airlines, if realised, will help China Southern Airlines to strengthen its footprint in the American market,” said Vincent Ha, an analyst at Deutsche Bank. “But we do not expect the impact to be immediate and significant at the beginning.”

The deal came two days before China Southern reported that its net profit had surged 35 per cent last year to 5.04 billion yuan (US$731.6 million) as it repaid dollar debt ahead of schedule to mitigate the impact of the yuan’s depreciation.

However, yield per revenue passenger kilometre – the average amount that a passenger pays to fly one kilometre – dropped both for domestic and international routes, down 3.6 per cent and 11.1 per cent respectively in 2016 from the previous year.

The competition among major carriers, especially for international routes, caused the yield decline
Luo Laijun, China Southern

“The competition among major carriers, especially for international routes, caused the yield decline, and now most carriers own wide-body jets which are available for long-haul flights,” said Luo. “Yield decline pressure for overseas routes will extend through 2017 but at a modest pace, with the expectation of rising demand.”

Lo said China Southern has cut one third of its flights to South Korea because of escalating tensions between two countries over the deployment of the THAAD missile defence system.

“The seat occupancy rate for our flights to South Korea now is very low,” he said. Seat occupancy rate is the ratio of passengers to available seats on board a given flight.

However, the carrier suffered smaller foreign-exchange losses after taking steps to manage the risk of fluctuations in exchange rate.

The firm said it recorded a foreign-exchange loss of 3.27 billion yuan last year, compared to 5.95 billion yuan in 2015, after actively adjusting its debt structure. The proportion of China Southern’s debt denominated in yuan increased from 30.69 per cent to 51.16 per cent after it repaid a debt of US$1.837 billion of dollar debt ahead of schedule.

“The yuan financing ratio will reach 70 per cent by the end of this year, then our foreign-exchange losses will decrease further,” said chief finance officer Xiao Lixin. “We expect the Chinese yuan will further depreciate in the coming two years.”

In order to improve performance, China Southern continued to increase direct sales while cutting agency activities. Its direct sales climbed to more than 40 per cent of the total, and agency fees dropped by 1.2 billion yuan from the prior year, the company said.

The airline also shifted towards lower interest-rate financing instruments such as issuing corporate bonds and ultra-short-term financing bills. Its direct financing ratio excluding obligations under finance leases increased to 88.9 per cent from 29.5 per cent.