China Southern Airlines Company Ltd. Business Information, Profile, and History

Company Perspectives:

Stringent administration; safe and punctual flight; smooth and efficient operation; warm and courteous services are the main objectives of China Southern Airlines.

With fleet expansion and further growth of our route network, China Southern Airlines enters a new milestone.

History of China Southern Airlines Company Ltd.

China Southern Airlines Company Ltd. (CSA) has been China's top passenger carrier for two decades, propelled by the robust economy of Guangzhou, the country's commercial center. After gaining permission to fly abroad, China Southern has eclipsed rivals China Eastern and Air China in terms of international prestige. CSA boasts one of the world's youngest fleets and an above-average safety record among Chinese carriers. It offers Western-style passenger amenities such as Hollywood movies and an in-flight magazine. One of the top 25 carriers in the world, China Southern flies to more than 80 cities worldwide, including Los Angeles and Amsterdam. The carrier is also developing a cargo network.

Origins and Independence

China Southern Airlines was formed out of the China Civil Aviation Administration (CCAC), which itself had been created from the U.S.-led China National Aviation Corporation and other assets left behind by those fleeing the Communists in 1949. Five years later, CCAC merged with the Sino-Soviet Joint Stock Company, which had responsibility for air service in the north of China. This created the Chinese Civil Aviation Bureau (CAB), with divisions based in Peking, Shanghai, Shenyang, Si'an, Wuhan, and Guangzhou--later the base for China Southern. In April 1962, the CAB became the Civil Aviation Administration of China (CAAC). Over the next 20 years, the CAAC gradually evolved from dependence on Soviet aviation technology to a customer-driven preference for British and American jets, culminating in orders for Boeing 747s and Concordes, although the latter were never delivered.

A reorganization of the CAAC in late 1984 produced the following four regional divisions: Eastern, Southern, Southwestern, and Northwestern. The liberalization of the domestic market soon produced other carriers such as Xiamen Airlines, which operated on China Southern's turf. Because of the commercial importance of Guangzhou (formerly Canton), China Southern was cleared for international flights, along with Shanghai-based China Eastern. Yu Yanen, an active pilot himself, was appointed president of the airline.

China Southern was granted its autonomy on July 1, 1988. However, the CAAC still controlled aircraft purchasing and worked very closely with its newly independent branches. The government also made its voice known to domestic passengers--an official letter of recommendation was a prerequisite for booking a flight until 1993.

In spite of the oversight from Beijing, the airline pursued partnerships with Western aviation companies to increase its expertise and revenue potential. In 1990, China Southern set up a maintenance joint venture with Hutchison Whampoa (Hong Kong; 25 percent) and Lockheed (United States; 25 percent) called Guangzhou Aircraft Maintenance Engineering Co. (GAMECO). The center specialized in Boeing 757 and 747 aircraft and boasted labor costs one-forth of those in the West. A flight simulator station was also under development.

China Southern carried nearly six million people in 1991, up more than sixfold from a decade earlier. Cargo traffic boomed as well. The carrier flew to 90 cities at home and 17 international destinations and operated a fleet of 38 Boeing jets. Employment was about 6,000. One of China Southern's 737s flew into a mountain in 1992, puzzling observers who had seen the vast improvements made by China's commercial airlines in the previous decade.

CSA posted a profit of US$102 million on revenues of US$537 million in 1992. With Air China, China Eastern, and a few dozen companies in other industries, the carrier was given special financial independence. One drawback to this was the increased cost of buying fuel on the open market and paying airport fees. China Southern also had to compete vigorously to attract qualified pilots. However, the carrier was able to shed various general aviation activities such as forestry service inherited from the 1950s.

Demand for commercial aircraft softened in the wake of the Persian Gulf War, giving Yu an opportunity to acquire the Boeing 777s needed to establish China Southern as a long-haul international carrier. Boeing lowered its price and stepped up its delivery schedule; CSA was the first Asian airline to operate this state-of-the-art jet.

Letting in the Foreigners in the Mid-1990s

The Chinese government opened its airlines to the possibility of foreign investment in 1994. United Airlines and China Southern were early to the negotiating table. CSA also began to plan for a listing on the New York Stock Exchange. It needed the capital to distance itself from other smaller, largely unprofitable Chinese airlines, among the world's most dangerous to fly. CSA had already entered training and maintenance agreements with U.S. carriers. It contracted with American Airlines' sister company Sabre Decision Technologies to develop its operations control center.

Sales doubled in 1994, although profit fell due to increased costs associated with the company's growth. It added four international and 26 domestic routes in 1995. Passenger traffic exploded in the early 1990s; gross revenues reached $1.1 billion in 1996; the Xiamen Airlines unit contributed another $400 million. Net income was $1.4 billion (RMB 887 million). CSA and associated airlines were flying 15 million passengers a year. CSA's domestic subsidiaries covered 68 destinations within China.

Yu had resisted pressure to order Airbuses (and, earlier in the decade, MD-80s being manufactured in Shanghai), at least until April 1996, when the CAAC ordered 20 Airbus A320s for the company. CSA added a fifth Boeing 777 in 1997 as it expanded international services in a bid to usurp Air China's leading position. CSA had an advantage in the liberal, business-oriented climate of its southern home, compared to Air China's bureaucratic home base of Beijing. The carrier operated 63 jets (plus 15 through Xiamen Airlines and dozens more through other subsidiaries) to Air China's 50.

Even though the airline had invested heavily in bringing capacity to the international market, domestic flights accounted for almost 80 percent of its passenger revenues. The domestic carriers were an important source of feeder traffic; to keep passengers coming in from abroad, CSA signed a code sharing arrangement with Delta Air Lines. However, international flights brought in vitally needed hard currency. Cargo operations provided less than ten percent of the carrier's revenues.

In July 1997, China Southern finally made its initial public offering on the Hong Kong and New York Stock Exchanges, raising some $600 to $700 million. A strong local economy and hub in the gateway city of Guangzhou were two key selling points. The CAAC still owned about two-thirds of CSA after the IPO. CSA reported revenues of $1.5 billion) in 1997. The next year, the first loss in CSA's history, compounded by unfavorable exchange rates, amounted to RMB 544 million ($65 million) on revenues of RMB 10.6 billion. As a group, Chinese airlines lost US$775 million in 1998.

Even after the IPO, CSA and Xiamen Airlines together had nearly US$2 billion in debt. Within a few months, the Asian financial crisis soured investors on CSA's short-term prospects. A sharp decline in traffic manifested itself quickly. In the first half of 1998, CSA lost even more than was expected, RMB 72 million. Managers scrambled to contain costs but with already cheap land, cheap labor, and expensive new planes to maintain, their options were limited. About 600 workers were laid off and a couple of airplanes returned. The prospect of growth via teaming with Delta Air Lines in the U.S. market offered some hope; CSA offered special incentives to U.S. travel agents. The Chinese government reduced infrastructure taxes to help the struggling airlines, saving China Southern approximately RMB 500 million a year.

The domestic Chinese market showed some signs of improvement by early 1999, as the CAAC intervened to control pricing and capacity. CSA's cargo traffic improved by 12 percent in the first quarter. The CAAC also planned to merge all of China's 34 airlines into a handful of groups. A merger of China Southern with Air China was expected to lead the process. China Southern management was likely to take over the proposed entity--Air China's head had already been replaced by the leader of China Eastern Airlines due to poor financial performance. In fact, Air China was not yet strong enough to launch its own public offering, despite several years of trying. Air China would bring better U.S. destinations to the merger, a key to competing with major U.S. airlines. As of mid-1999, CSA operated 99 aircraft and Air China 60, together accounting for more than a third of China's total commercial airliners and half the country's air traffic.

Although susceptible to exchange rate fluctuations in the future, China Southern has long demonstrated an uncanny ability to navigate between bureaucratic demands of the socialist regime at home and the requirements of competition in the open market. China Southern President Yan Zhi Qing stated a goal of becoming the world's number one airline--not an altogether out of sight target, given the airline's phenomenal rate of growth and the impending merger.

Principal Subsidiaries: China Southern Henan Airlines; Hubei Airlines; Hunan Airlines; Shenzhen Airlines; Hainan Airlines; Zhuhai Helicopter Company; Xiamen Airlines (60%); Shantou Airlines (60%); Guangxi Airlines (60%); Zhuhai Airlines (60%); Guangzhou Aircraft Maintenance and Engineering Co. (50 %); Guangzhou Nanland Air Catering Co. (51%); Baiyun Xinhua (Guangzhou) Air Cargo Service (70%); China Southern West Australian Flying College (Australia; 65%); Hainan Phoenix Information Systems (45%); Southern Airlines Group Finance Co. (47%).

Principal Competitors: China Eastern Airlines; Cathay Pacific Airways Ltd.; Korean Air Lines Co. Ltd.

Chronology

• Key Dates:

• 1984: Civil Aviation Administration of China divides into five separate airlines.
• 1988: China Southern Airlines (CSA) is officially granted autonomy.
• 1992: Beijing grants CSA further financial independence.
• 1997: CSA goes public, listing on the Hong Kong and New York Stock Exchanges.
• 1998: Asian financial crisis leads to CSA's first ever annual loss.