10 Year forecast of global emerging threats to China Southern Airlines, with focus on development of domestic high speed rail, fuel prices, maintaining growth in China, economic downturn, governmental influence.
China Southern has significant exposure to foreign currency risk as substantially all of the Group’s obligations under finance lease and bank and other loans are denominated in foreign currencies, principally in US dollars.
China Southern Airlines - 10 Year Emergent Threat Analysis
CHINA SOUTHERN AIRLINES<br />A look into the emergent threats<br />Adam Marriott<br />06008442<br />
Background Information<br /> Largest airline in The People’s Republic of China<br /><ul><li>1st Chinese and newest member of SkyTeam Alliance from 2007 – allowing for code sharing with most recently Air France-KLM (Aug 2009)
China Southern is the world's 5th largest airline by passenger carried, Asia's largest airline in terms of both fleet size and in passengers carried. Fleet size of 342 (2009) More than Airfrance-KLM and BA
China Southern has carried 30.95 million passengers in the first half of 2009 - 10.98% higher than the same time last year
Five-Star Flight Safety Award by the CAAC in 2008, 2007, 2004, 2003, 2001
China Southern has a network of flight routes with Guangzhou and Beijing as the hubs, covering China and the rest of Asia and connecting Europe, America, Australia and Africa.</li></ul>Top Five Emergent Threats within 10 Years<br />Development of High Speed Rail<br />Governmental and CAAC Influence<br />Maintaining Growth<br />Oil Prices/Peak Oil<br />Economic<br />Voted Best Airline in China SKYTRAX 2009<br />China Southern Airlines<br />
First Emergent Threat<br />Development of High Speed Rail in China<br />China has announced plans to build 42 new high-speed railway lines over the next three years.(bbc.co.uk)<br />"Three hours' travel time by train means a share between 66% and 70% of the air and rail market.“<br />SNCF CEO Guillaume Pepy<br /><ul><li>Chinese rail network government owned
China will have added 13,000km of high-speed lines by 2012, shortening journey times considerably for the expected seven billion annual passengers.(bbc.co.uk)
China will invest $50 billion on its high-speed rail system in 2009 and the total construction cost of the high-speed rail system is $300 billion
Speed : 300-350 km/h, this is the top high-speed railway in the world</li></li></ul><li>
Amongst 160 domestic routes of China Southern Airlines, about 38 will directly rival the express trains <br />
First Emergent Threat<br />Development of High Speed Rail in China<br />Solutions<br /><ul><li>Air Fast Track – Direct flights at very high frequency coupled with special security channels, luggage zone and information desk to offer faster flights on direct rail competition. (www.tradingmarkets.com)
Add more air express routes to better compete with high-speed railway connections
Expand international network to Asia-Pacific, due to increased rail competition three to five years, the proportion of its international airlines to the total will likely be lifted to more than 20% from 17%.(tradingmarkets.com)
”If you are travelling less than 1,500km, taking the train wins,” Rail Europe CEO Pierre-Stephane Austi. (http://www.news.com.au) Therefore a focus on long-haul routes will counter the competition.</li></ul>Chinese Bombardier Train <br />
Second Emergent Threat<br />Governmental and CAAC (Civil Aviation Administration of China)<br />Influence<br /><ul><li>One of the big three China Airlines that are State owned [China Eastern Airlines and Air China]
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 China Southern to respond to competition, lower expenses, and adapt to market conditions
Communist government - known to carry out own procedures without consultation – Capitalism without Democracy
Chinese government does not let the fares rise to try and prime from a largely undeveloped market (the poorer cities to the west) this is despite rises in fuel.</li></ul>“The theory of Communism may be summed up in one sentence: Abolish all private property.” <br />Karl Marx <br />
Second Emergent Threat<br />Governmental and CAAC (Civil Aviation Administration of China) Influence<br />Solutions<br /><ul><li>China adjusts fuel prices when oil costs change more than 4 percent over 22 straight working days – Allowing for a more competitive price
Chinese airlines are allowed to hedge fuel for international routes, while prices for domestic routes are fixed.(chinadaily.com.cn)
Private owned Airlines historically more likely to make a profit, less governmental waste and bailout – Privatisation a hard solution to achieve.
No real solution in battling legislation put upon China Southern Airlines by the Government/CAAC appeals can be made but are often shot down by the government who take a authoritative position in the running of the industry. </li></li></ul><li>Third Emergent Threat<br />Maintaining Growth in China<br />Seventy-three percent of the airports in China are small airports that handle less than a million passengers a year. <br />(CAAC)<br /><ul><li>Enormous funding requirement, as a number of new aircraft arrive in the coming years, requirement of investment into new airports as part of China Stimulus plan
Overcapacity and a lack of demand since recession
China Southern posts 11% growth in traffic in October
Airbus SAS, the world's largest maker of commercial aircraft, said in a report that China's aviation market will see an annual increase of 7.9 percent in the next 20 years, following India to become the world's second fastest growing market.(chinadaily.com.cn)</li></li></ul><li>Third Emergent Threat<br />Maintaining Growth in China<br />Solutions<br /><ul><li>Domestic numbers grew by 12% to 5.6 million, regional numbers increased by 21% to 129,000 and international numbers were up 11% to 362,500. (October)
Passenger load factor increased by 1.7 percentage points to 78.3%(flightglobal.com)
In August, China's total air traffic turnover obtained a month-on-month growth of 7.4 percent and a year-on-year growth of 30.6 percent. The passenger traffic turnover registered growth of 7.6 percent on month and 41.6 percent on year.. – Less than previous 20% increases year on year</li></ul>centreforaviation.com<br /><ul><li>Substantial growth can only be sustained with massive investment, Chinese Government are already making these kind of investments.
A expansion of fleet and infrastructures in China is the only way to cater for extra demand </li></li></ul><li>Fourth Emergent Threat<br />Oil/Fuel Prices – Peak Oil<br />Fuel Prices <br /><ul><li>Oil Prices fluctuate very often, hard to predict due to speculation
"And it seems that the government is inclined to keep a $7-8 gap between the domestic price and global crude prices“ (www.energychinaforum.com)
China Southern consumed 12 million tons of jet fuel in 2008
All Chinese airlines, are mandated by the CAAC to buy their jet fuel exclusively from the China Aviation Oil Supplies</li></ul>Peak Oil<br /><ul><li>“Peak oil is the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline.”(wikipedia)
What does this mean? A high rise in oil prices and a political instability through possible resource wars.
Pure speculation and predictions, hard to make a solid prediction
It has happened before... 1979 energy crisis a small 5% decrease in supply caused $15 a barrel to rise to $39. All time high until 2008. (1979_energy_crisis.totallyexplained.com)
Oil is not limitless. </li></ul>“Jet fuel accounted for about 40 percent of the total operating costs of Chinese airlines.”<br />news.airwise.com<br />
Fourth Emergent Threat<br />Oil/Fuel Prices – Peak Oil<br />Solutions<br /><ul><li>China Government lifted a control on jet fuel surcharges. When fuel rises to a certain amount.
China Southern will impose a charge of 50 Yuan ($7.32) for flights of more than 800 kilometres (500 miles)(bloomberg.com)
Cut back on costs to counter the effect of Fuel Prices
Fuel hedging to cater for a rise in the future</li></ul>“Jet fuel accounted for about 40 percent of the total operating costs of Chinese airlines.”<br />news.airwise.com<br />
Fifth Emergent Threat<br />Global Issues – Economic<br /><ul><li>China Southern has significant exposure to foreign currency risk as nearly all of China Southern’s obligations under finance lease and bank and other loans are denominated in foreign currencies, principally in US dollars.
China Southern Airlines Co., the country's largest carrier by fleet size, received a CNY3 billion ($439 million) subsidy from the government last month(online.wsj.com)
China Southern, Asia’s biggest carrier by passenger numbers, posted a net profit of 284 million Yuan ($42 million), compared with a loss of 830 million Yuan a year earlier (bloomberg.com)
Despite the current global financial crisis, China Southern has carried 30.95 million passengers in the first half of 2009 - 10.98% higher than the same time last year.</li></ul>“Looking forward into 2009, the airlines industry will continuously face challenges such as a decrease in international market demand and an overcapacity in the domestic market.”<br />Si Xian Min China Southern AirlinesChairman<br />
Fifth Emergent Threat<br />Global Issues – Environmental and Economic<br />Solutions<br /><ul><li>China Southern Airlines Co., the country's largest carrier by fleet size, received a CNY3 billion ($439 million) subsidy from the government last month(online.wsj.com) – Stimulus’ plans are available for the state owned airline whenever they are needed. This gives an almost ‘too big to fail’ mentality
Fuel hedging is an option to cater for any excess rise of prices. A temporary fix to high costs
A structural and management reshuffle could reduce costs for the Airline. – Government waste is common for public owned companies
Maintaining growth in a growing market will also increase revenue which should in theory raise profit margins if costs are kept low
Cutbacks on routes that face too much competition or too much capacity is an option of reducing any costs
Expansion into overseas market can offset any rail infringement on domestic routes</li></li></ul><li>Summary<br /><ul><li>Outlook for the Aviation Industry as a whole is one of quiet optimism predictions of global booms of flight have subdued since the recession and the cost of fuel.
Rapid growth can only be sustained if costs are low with the cost to fly rising and the onslaught of rail. Maintaining growth will be hard.
With Extensive Government backing and a seemingly limitless supply of money to prevent bankruptcy China Southern can ride through the global recession with little worry. However, government intervention often restrains and limits China Southern and can pose a threat in the future if capacity is too high or prices too high putting China Southern at a disadvantage to international carriers.
Capacity will have to be restrained due to rail competition. This is despite the clear demand and the double digit growth over the past few years. A balance of long haul international and long haul domestic should cater for the drop in demand from trains. </li></ul>To Summarise – China Southern is at an advantage compared to other airlines who have a largely stagnated market to tap into. China Southern can adapt for the rapid growth of China and benefit from the economic power it has become and will become.<br />
Any Questions?<br />Adam Marriott<br />06008442<br />