China Southern A380 Spearheads Challenge to Cathay Pacific

China Southern Airlines Co.’s focus on domestic flights made it Asia’s largest carrier by passengers. Now, it’s adding Airbus SAS A380s to help challenge Cathay Pacific Airways Ltd. (293) and Singapore Airlines Ltd. (SIA) on routes to Europe and North America.

The carrier, which flew 76.5 million passengers last year, will begin flying the first of five superjumbos next month. It will be the seventh operator worldwide and the only one in China. The double-decker planes will spearhead the state- controlled company’s drive to more than double the percentage of capacity deployed on overseas routes to 35 percent by 2015, said Yang Bo, the head of its planning department.

“Flying A380s will put us in a completely different league,” he said, declining to name routes for the 506-seat aircraft before a Sept. 20 event. “We hope to use the planes to build a good brand image and to raise our profile overseas.”

The carrier has added services to Vancouver, Auckland and Amsterdam this year as it boosts international capacity 33 percent and tries to develop Guangzhou airport into a global hub rivaling Hong Kong less than 200 kilometers (125 miles) away. Air China Ltd. (601111) and China Eastern Airlines Corp. are also boosting overseas flights as economic growth means the number of Chinese travelers flying abroad this year may rise 13 percent to 65 million, according to the state-run China National Tourism Administration.

‘Amazing Position’

“The Chinese carriers are in an amazing position,” said Qantas Airways Ltd. (QAN) Chief Executive Officer Alan Joyce. “They have got the scale that will make them huge and I think they will be a big challenge for the Middle Eastern carriers as well as the Asian carriers.”

China Southern will fly its first A380 from Oct. 18 to Oct. 28 on routes between Shanghai, Beijing and Guangzhou to test operations and promote the aircraft before moving it onto international routes. The superjumbos will have eight first- class seats, 70 in business and 428 in coach.

The airline plans to boost its total fleet to 645 planes by the end of 2015 from 424 planes as of June. Its other on-order planes include Airbus A330s and A320s, as well as 10 Boeing Co. 787s.

The carrier fell 0.4 percent to HK$4.68 at close of Hong Kong trading today. It’s dropped 1.7 percent this year, compared with a 36 percent decline for Cathay Pacific and a 17 percent drop for Air China, the nation’s largest international carrier. Qantas has tumbled 37 percent in Sydney.

Australia Flights

Qantas is already competing with China Southern, as the Chinese airline is boosting Australia services as part of its intercontinental push. Similar drives in Europe and North America will follow, partly to offset competition from high- speed trains on domestic routes, Yang said, without elaboration.

The carrier will offer 42 flights a week to Australia and New Zealand from November when it begins services to Perth. It already flies to Sydney, Brisbane, Melbourne and Auckland, mainly using Boeing 777s and Airbus A330s. Cathay flies at least once a day to six Australian cities from Hong Kong. Qantas serves Hong Kong and Shanghai from Australia.

‘Aggressive Expansion’

“China Southern’s aggressive expansion will definitely hit Cathay and other Australian routes operators,” said Kelvin Lau, a Hong Kong-based Daiwa Securities Group analyst. “Still, a new player may grow the overall market.”

The effectiveness of the China Southern A380s in winning premium passengers will depend upon the quality of cabins and other facilities, said Qantas’ Joyce. The Australian airline operates superjumbos, along with Singapore Airlines, Air France, Emirates Airline, Korean Air Lines Co. and Deutsche Lufthansa AG.

Qantas is setting up a new airline in Southeast Asia and another in Japan to target China travelers, while Delta Air Lines Inc. and American Airlines have also boosted China flights because of rising demand. Cathay Pacific is refitting business- class cabins, introducing premium-economy seating and adding new long-haul planes.

“We deal with competition by ensuring that we provide the most competitive products and services,” the Hong Kong-based carrier said by e-mail.

Singapore Airlines plans to add flights to more small cities in China, as well as increasing services to major destinations like Shanghai and Beijing, Chief Executive Officer Goh Choon Phong said this week in Toulouse, France.

Lounges, Chauffeurs

China Southern has renovated business lounges and added chauffeur services to lure premium travelers. The changes helped it win the title of world’s most improved carrier at this year’s SkyTrax awards, which are voted on by more than 18.8 million travelers worldwide. The airline has a four-star rating from the review company, the same as Air China, Qantas and British Airways. Cathay Pacific and Singapore Air both have five stars, while American and Delta each hold three.

China Southern flew a total of 3.9 million passengers on international routes in the first eight months of the year, 16 percent more than a year earlier. On domestic routes, passenger numbers rose 4.2 percent to 48.5 million, while capacity rose 5.6 percent. The carrier also flew 1.2 million travelers on Hong Kong, Macau and Taiwan routes.

The rise in international passenger numbers has come at the cost of margins. On overseas routes, the airline’s yields, a measure of average fares, were 5 percent lower in the first half of this year than in the second half of last year even as fuel costs rose, UOB-Kay Hian Holdings Ltd. analysts K. Ajith and Eugene Ng said in a Sept. 13 note. That contributed to operating margin falling to 6.1 percent from 10.6 percent in the same period, they said. The analysts reiterated a ‘sell’ rating.

Profit Jump

Still, China Southern boosted first-half net income 33 percent in the first half to 2.76 billion yuan ($432 million) on rising domestic travel and currency gains from the stronger yuan.

“Profitability is the last thing China Southern considers in overseas expansion,” said Li Lei, a Beijing-based China Securities Co. analyst. “The priority is to grab more market share.”

The airline has won overseas travelers in Guangdong, its home province, which has become China’s biggest by economic output because of investments from companies including Procter & Gamble Co., Toyota Motor Corp. and Apple Inc. (AAPL) supplier Foxconn Technology Group.

Sherming Ma, 30, a Guangzhou-based associate manager for a U.S. food company flew to Moscow in June with China Southern after paying 2,099 yuan ($330) for a round-trip ticket. This month, she booked a trip to Australia with the carrier to avoid having to take a three-hour bus ride to Hong Kong.

“The Moscow price was so attractive that I actually asked a flight attendant how could they make money out of it,” Ma said. “There’s no way I’ll be trudging down to Hong Kong again if I can avoid it.”

To contact the reporters on this story: Jasmine Wang in Hong Kong at Jwang513@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net

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