China Southern Airlines Company Limited (China Southern), is one of three major airlines in China. It is the largest Chinese carrier by fleet size, and the ninth largest airline in the world. 90% of China Southern's revenue comes from passenger transport, dwarfing its mail and cargo transport divisions.
ZNH operates in a cyclical industry with high costs, such as aircraft and jet fuel. These factors, in addition to potentially insufficient demand for the airlines’ ever-increasing passenger capacity, threaten the company’s operational health.
Incorporated on March 25, 1995, China Southern Airlines Company Limited (ZNH) offers commercial airline service throughout China, the Hong Kong and Macau regions, and Southeast Asia. The company made an initial public offering in July 1997 in the Hong Kong Stock Exchange and the New York Stock Exchange. ZNH is one of the three largest Chinese airlines.
The company operates through several airline subsidiaries: Xiamen Airlines, Southern Airlines (Group) Shantou Airlines Company Limited (“Shantou Airlines”), Guangxi Airlines Company Limited (“Guangxi Airlines”), Zhuhai Airlines Company Limited (“Zhuhai Airlines”) and Guizhou Airlines Company Limited (“Guizhou Airlines”).
In 2009, ZNH generated a net income of ¥527 million on total revenues of ¥54.8 billion. This represents a significant turnaroundfrom 2008, when the company incurred a net loss of ¥4.79 billion on revenues of ¥55.29 billion.
Because of regulations and checks imposed by the General Administration of Civil Aviation of China (CAAC) on the Chinese commercial airline industry, the company faces restrictions and difficulties with implementing its business strategies. The CAAC imposes regulations on domestic and international routes, air fares, jet fuel prices, aircraft maintenance, and air traffic control, among others. While these regulations are necessary to ensure safety in the industry, they also limit the flexibility of ZNH to respond to competition, lower expenses, and adapt to market conditions.
In light of the recent surge in air traffic volume in China, the CAAC has imposed tighter regulations to promote a safe environment of qualified flight personnel, safe airlines, and quality airport facilities. All of the procedures involved in ensuring these expectations are met result in the constant questioning and checking of the company’s operational procedures, which can be perceived by the passenger to represent company insecurity and lack of safety. Also, this means a longer waiting time on the runway, which adversely affects the customer’s opinion of the company. The ability of ZNH to abide by these expectations relies on factors beyond the company’s influence, including the quality of national air traffic control and control operations at Chinese airports.
The company, and all Chinese airlines, are mandated by the CAAC to buy their jet fuel exclusively from the China Aviation Oil Supplies (CAOSC) and other companies controlled by the CAAC. As of late, prices have remained higher than world market prices, resulting in the shortage of jet fuel supply. This has forced the delay and cancellation of flights in the past, and has the potential to disrupt operations in the future.
Due to the nature of the industry, China Southern has to invest large funds to acquire aircraft, train members, and maintain equipment; however, with 17 different types of aircraft, there is concern that all China’s airlines are adding capacity faster than customers are demanding airplane transport services. This could potentially result in large, future losses.
Due to recent relaxation of certain regulations by the CAAC and an increase in the capacity, routes and flights of Chinese airlines, competition has increased. Competition in the Chinese commercial aviation industry has led to widespread price-cutting that violates CAAC regulations. Until said regulations are more strongly enforced, discounted tickets from competitors will continue to have an adverse effect on the company’s sales. Competitors to China Southern in domestic routes include Air China and China Eastern Airlines, which primarily operates out of Shanghai.
The company's competitors in Hong Kong regional routes include Dragon Air, and Air Macau Group, Ltd. In international routes main competitors consist of Thai Airways International, Singapore Airlines, Malaysian Airlines System, Air China and China Eastern. Air France-KLM is a principal competitor in European routes. The non-Chinese airline competitors set themselves apart from China Southern as they carry greater financial and technological resources, and better name recognition. Also, public opinion on the safety and service records of China Southern inhibit its ability to compete with its Hong Kong regional and international counterparts. Particularly, international competitors have more comprehensive and convenient reservation systems and larger sales networks that allow them to attract more international customers than China Southern.