China Southern Posts Profit as Yuan Masks Operating Loss

China Southern Airlines Co. (1055), Asia’s biggest carrier by traffic, posted a first-half profit as gains from the yuan’s appreciation helped mask an operating loss caused by competition with bullet trains. The shares dropped.

The airline reaped a foreign-exchange gain of 1.5 billion yuan ($245 million) in the six months through June. The Guangzhou-based company’s profit missed estimates and was the worst in three years.

The earnings are a pointer to how the strengthening currency may help prop results at China Eastern Airlines (670) Corp. and Air China Ltd. (601111), both due to report this week. China Southern -- the only national carrier to fly an Airbus SAS superjumbo and a Boeing Co. Dreamliner -- is also discounting tickets as high-speed trains offer competition and President Xi Jinping discourages officials from taking overseas trips.

“The operating loss shows its fundamental airline business is weak,” said Will Horton, an analyst at CAPA Centre for Aviation. “Foreign exchange is hugely picking the airline’s net performance up, but this can be a volatile factor. Over the long term, you need a steady operating business to accommodate the infamous volatility aviation brings.”

Photographer: Nelson Ching/Bloomberg

Passengers board a China Southern Airlines Co. airplane at Beijing Capital International Airport in Beijing. Close

Passengers board a China Southern Airlines Co. airplane at Beijing Capital... Read More

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Photographer: Nelson Ching/Bloomberg

Passengers board a China Southern Airlines Co. airplane at Beijing Capital International Airport in Beijing.

China Southern shares fell 3.8 percent, the most in more than a week, to close at HK$2.81 in Hong Kong. Air China (753), reporting later today, rose 0.2 percent and China Eastern advanced 0.4 percent.

Best Performer

Net income in the six months ended in June fell 19 percent to 344 million yuan, China Southern said in a filing to the Hong Kong stock exchange yesterday. That lagged behind the 516 million-yuan median profit estimate of five analysts surveyed by Bloomberg News. The operating loss was 114 million yuan.

Chinese airlines “faced many challenges from economy, politics and high-speed rail competition,” Citigroup Inc. analyst Vivian Tao said in a report today.

China Southern generated the foreign exchange gain in the first half as the yuan was the best performer against the U.S. dollar among 24 emerging market currencies tracked by Bloomberg. A stronger local currency helps Chinese airlines pare the repatriated value of dollar-denominated debts at a time when they contend with cooling Chinese growth and overcapacity.

High-Speed Trains

“Having been influenced by domestic and international economic conditions, and with the emerging unfavorable factors including slowing-down market demand, rapidly increasing capacity and high-speed rail, the competition in the domestic market is fiercer,” China Southern said in its statement. This “put the company’s operation under greater pressure.”

China opened the world’s longest high-speed rail line at the end of last year between Beijing in the north and Guangzhou in the south. The service cuts train- travel time between the two cities to eight hours from almost a day.

China Southern had a currency loss of 314 million yuan a year earlier, according to its statement. The yuan gained 1.5 percent against the U.S. dollar in the first half.

Passenger yields, a measure of average ticket price, fell 11 percent in the first half, the worst decline in four years. China Southern carried 43.8 million passengers, 6.3 percent more than a year earlier, while it expanded seat capacity by 9.3 percent, according to the statement.

The airline plans to deploy its Airbus A380s on Guangzhou-Sydney route in October. The carrier hasn’t won the right to fly the plane on overseas routes from the nation’s capital Beijing even after receiving its first superjumbo about two years ago. The airline has been mostly using its five A380s for domestic services or on the Guangzhou-Los Angeles route.

To contact the reporter on this story: Jasmine Wang in Hong Kong at jwang513@bloomberg.net

To contact the editor responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net

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