China Southern Earnings: Profit Drops 19%

China Southern Airlines Co. kicked off earnings reports for Chinese airlines with a 19% decline in first-half profit, signaling trouble for the country's carriers as slowing economic growth curtails demand.

China Southern has the largest domestic market presence of the three big state-owned carriers, leaving it the most vulnerable to declining demand. A frugality campaign spearheaded by Chinese President Xi Jinping has weighed on sales of first- and business-class services, analysts said.

"The carrier's outlook will remain challenging and there isn't a quick fix," said Eric Lin, Asia transportation analyst at UBS Securities. "The carrier's profitability in the second half will continue to be hurt by China's slowing economic growth, intensifying domestic competition, as well as an increase in capacity that has put pressure on domestic airfares."

China Southern, the country's largest airline by fleet size, said Monday that its net profit dropped to 344 million Chinese yuan ($56.2 million) from 424 million yuan a year earlier. Analysts had forecast a profit of 405 million yuan for the latest half.

China Southern booked a foreign-exchange gain of 1.52 billion yuan, reversing a 314 million yuan loss a year earlier, when the yuan fell nearly 1% against the dollar. The Chinese currency gained 1.6% against the dollar in the first half, adding to a 2% gain in the second half of last year. Mr. Lin said foreign-exchange gains would help cushion Chinese carriers' earnings as demand weakens.

China Southern notched a 114 million yuan operating loss, compared with an operating profit of 1.77 billion yuan a year earlier.

Its number of passengers rose 6.3% to 43.8 million, in contrast to the double-digit growth that used to be common for Chinese carriers. The proportion of seats filled on each flight barely rose, to 80%.

"Many Chinese state enterprises are cutting their travel expenses, putting pressure on airfares and demand for front-end cabins," said Bonnie Chan, an analyst at Macquarie.

To mitigate weaker demand, China Southern is seeking to deploy more fuel-efficient planes to fly long distance. An airline executive last week said the carrier plans to fly the Airbus A380 superjumbo on China Southern's twice-daily Guangzhou-Sydney route beginning late October.

The Guangzhou-based carrier is the first of the three major state carriers to report first-half results. Air China Ltd.'s earnings release is slated for Tuesday, and China Eastern Airlines Corp. is expected to report on Friday. 

Source: Wall Street Journal by Joanne Chiu | Photo: Reuters