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China Southern Airlines Company (ZNH)Stock (Airlines Industry, Transportation Industry)
 China Southern Airlines Company Limited (China Southern), is one of three major airlines in China. In 2006, it accounted for approximately 26.4% of the total commercial air traffic industry 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. As of December 31, 2006, China Southern operated 616 routes comprising 501 domestic routes, 90 international routes, and 25 routes in Hong Kong and Macau. It operated a fleet of 309 aircraft, including 17 different plane models. This diversity in its fleet creates high costs in training, maintenance, and spare parts inventory, all of which leave the firm vulnerable to competition from low-cost competitors. However, close government regulation of the Chinese airline industry creates high barriers to entry for competing firms (for now). The Chinese government owns 50.3% of ZNH through an investment arm known as China Southern Air Holding Company. 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; in fact, ZNH has been operating on a loss for the past five years. [edit] Business FinancialsIncorporated 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 and, and as of 2006, it ranked first based on metrics including passengers carried, number of scheduled flights per week, number of hours flown and size of route network and aircraft fleet. 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 2006, these subsidiaries accounted for 26.2% of the company’s total passengers carried and 19.4 % of its traffic revenue. While company services primarily focus on the domestic market, in 2006, the company expanded into the global arena through joining the SkyTeam Alliance, and opening 18 international routes, including Tehran and Lagos, as well as nine new international destinations. As of the end of year 2006, ZNH operated 616 routes, of which 501 were domestic, 90 were international and 25 were to/from Hong Kong and Macau; meanwhile, top competitor China Eastern trailed, operating 423 routes. In addition, the company offers air cargo and mail services, which, in 2006, contributed to 7.8% of ZNH’s total revnue. As of December 31, 2006, the company operated through a fleet of 309 airplanes, consisting primarily of Boeing, Airbus and McDonnell Douglas models. ZNH is based in Guangzhou, the largest city in southern China, and, in December 2005, opened a branch in Beijing[1]. From key figures, we see that over the years, ZNH has significantly expanded its capacity and route network. Over a three year period, ending in December 31, 2006, the company’s revenue passenger kilometers (RPKs), the number of revenue passengers carried multiplied by the kilometers flown, increased at a compound annual rate of 36.8%, from 37,196 million in 2004 to 61,923 million in 2005, and to 69,582 million in 2006. Simultaneously, the company’s passenger capacity, measured in available seat kilometers (ASKs), increased at a compound annual rate of 34.4%, from 53,769 million in 2004 to 88,361 million in 2005, and to 97,059 million in 2006. In 2006, the Group carried 49.21 million passengers and had passenger revenue of RMB 41,549 million (US$5,321 million)[2].  
[edit] Trends and forces[edit] Government regulation of Chinese airlines affects ZNH's marginsBecause 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. [edit] Fluctuations in jet fuel prices threaten airline operationsThe 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. [edit] Expansion into Beijing, especially in light of the 2008 Beijing Summer Olympics, holds opportunities for company route network expansionThe company’s Guangzhou and Beijing branches will facilitate strategic refinement and expansion of its route network operations. These headquarter positions also allow the company to explore opportunities in the regional and international aviation market expected to be brought about by the 2008 Beijing Olympic Games. [edit] The airline industry is highly leveraged and cyclicalDue 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. In addition, the business is very cyclical as jet fuel prices are currently rising, and revenue is high, likely because of the 2008 Olympics in Beijing. [edit] CompetitionDue 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[4]. Competitors to China Southern in domestic routes include Air China and China Eastern Airlines, which primarily operates out of Shanghai. In 2006, China Eastern operated through 423 routes, which consisted of 299 domestic routes, 19 routes to Hong Kong, and 105 international routes; China Southern operated 616 routes comprising 501 domestic routes, 90 international routes, and 25 routes in Hong Kong and Macau. On January 22, 2008, China Eastern and China Southern agreed to cooperate in sharing routes and marketing, among other thing. This promises to aid China Southern in areas and locations in which is lags behind its Chinese competitors. 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[5].
 China Southern Airlines Company2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available
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