China Southern Airlines Co. (1055), Asia’s biggest carrier by passenger numbers, slumped the most in more than two months in Hong Kong trading after reporting a larger- than-expected 85 percent drop in first-half profit.
The airline, China’s biggest on domestic routes, fell as much as 6.1 percent, the biggest decline since June 8. It was down 5.3 percent at HK$3.41 as of 10:29 a.m. Air China Ltd. (753), which is due to report earnings later today, and China Eastern Airlines Corp. both dropped about 2 percent.
China Southern’s net income fell to 424 million yuan ($67 million), under international accounting standards, because of an economic slowdown sapping travel demand and higher fuel costs. The Guangzhou-based carrier also posted a currency- exchange loss, compared with a year-earlier gain, after the yuan weakened against the dollar for the first half-year decline since 2009.
“Business travel demand in China was dragged by the economic slowdown, which was worse than expected,” said Li Lei, a Beijing-based analyst at China Securities Co. “The carrier’s plans to add more overseas flights will be good in the long term, but may pressure profitability in the short term.”
The airline, China’s only operator of Airbus SAS (EAD) A380s, has also suffered from only flying the superjumbos on domestic routes, he said. The planes will be introduced on the carrier’s Guangzhou-Los Angeles route in October, ending a yearlong wait caused by regulatory delays.
The carrier’s sales rose 13 percent to 47 billion yuan, according to a filing to the Hong Kong stock exchange yesterday. The carrier was expected to report a first-half profit of 570 million yuan based on the median of three analyst estimates compiled by Bloomberg News. Under domestic accounting standards, first-half profit slumped 84 percent to 449 million yuan. The airline didn’t propose to pay an interim dividend.
The airline booked a net exchange loss of 314 million yuan, compared with a 1.24 billion yuan gain a year earlier. The Chinese currency weakened 0.95 percent against the dollar in the first six months, according to the China Foreign Exchange Trade System. Chinese carriers benefit from a stronger yuan as it pares the repatriated value of dollar-denominated debts used to buy planes and fuel overseas.
It is “hard” to see material gains in the yuan happening against the dollar again, the airline said. “Looking into the second half of 2012, the international economic situation will be more complicated with weak growth of the global economy.”
The carrier’s load factor, or the percentage of seats filled, dropped 1.1 percentage points to 79.5 percent as expansion outpaced demand. Passenger yields, a measure of average airfare, increased 3 percent in the first half from a year earlier. The carrier flew 41.2 million passengers during the period, 7.2 percent more than a year earlier.
Fuel costs rose 27 percent to 18.5 billion yuan on higher fuel prices and greater consumption. Average domestic fuel prices in China were about 15 percent higher in the first six months than a year earlier, Li said. Kerosene prices averaged $127.14 a barrel in Singapore trading in the period, compared with $125.91 a year earlier, according to data compiled by Bloomberg.
The company said in July that it expected first-half net income to slump more than 50 percent. It is due to receive the nation’s first Boeing Co. (BA:US) 787 later this year. It had a fleet of 468 planes as at the end of June.
China Southern has unveiled plans to challenge Singapore Airlines Ltd (SIA) and Emirates on Australia-Europe routes using its hub in Guangzhou. It started flights to London in June, building on existing services to Paris and Amsterdam. Australian services are due to climb to as many as 110 a week by 2015 from 42.
“Their aggressive capacity expansion and pricing strategy mean that yields should remain under pressure,” said Credit Suisse analysts Davin Wu and Timothy Ross in a note to clients today. “We expect the poor outlook on yields and the company’s inability to operate their five A380s profitably should continue to impact its earnings.”
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