China Southern Sees Leasing as Solution to Downturn by Henry Canaday, Contributing Editor

World Airline News, June 18, 1999

The introduction and understanding of market forces is the cornerstone of modern Chinese communism. But times have been difficult for the People's Republic, and its has found that the market can be a fickle friend, making many demands and offering few solutions. No more so than in commercial aviation, which has suffered more than most Chinese industry's from its neighbors financial misfortunes. However, the challenge has been taken, and attempts to stem losses are now being taken.

Inside China, airlines are scrambling to shed a few big jets by placing them in profitable service abroad. Carriers also boosted capacity in 1998 and discounted fares drastically to attract pricesensitive leisure traffic. However, though traffic edged up two percent, lower load factors and plummeting yields contributed to nearly US$300 million in net losses.

Early this year, the Chinese government, in the guise of the Civil Aviation Administration (CAAC) reduced its claim - equivalent to the U.S. airline ticket tax - from 10 percent to five percent of domestic airline revenues. In addition, the CAAC told carriers to reduce their total capacity by five percent, with emphasis on routes with the worst load factors. The CAAC also limited discounts to 20 percent off published fares.

But some airlines have other ideas on how best to handle the current downturn, including China Southern Airlines [ZNH], the country's largest carrier, which feels that the best option for survival is to lease out several of its nine Boeing [BA] 777s, preferably for the short term. The leasing of two 777s with crews to Biman Bangladesh for the annual Haj pilgrimage to Mecca has shown how effective this can be, marketing official Wells Zheng tells World Airline News.

Trans-Pacific traffic has also been strong, so much so that the carrier is contemplating increasing the frequency of its three flights a week from Guangzhou to Los Angeles, or even adding a new service to San Francisco.

But, China Southern gets nearly three-quarters of its revenue from its 300 domestic routes, and only 18 percent of revenue comes from the more lucrative 21 Hong Kong and 40 international services. Cargo accounts for the remainder.

The airline realizes that control of the market rest on obtaining higher yields. Change in policy has already proved fruitful, with the carrier increasing passenger traffic 2.5 percent from 1997 to 1998. But at the same time load factor dropped nearly five points to 60.6, and yield declined 10 percent. While squeezing out a slim US$65 million operating profit, China Southern lost US$66 million after interest, currency effects and taxes.