Chairman Mao would not have approved. If, as Mao alleged, western-style commercialism and capitalism are corrupt, then China Southern Airlines is rotten to the core.
As China closes the book on socialist economic dogma and emancipates its state-owned enterprises, China Southern is one of the first in line, ready to write a new chapter in Chinese industry.
The most aggressive Chinese airline in terms of marketing, China Southern has welcomed western style PR with open arms and flung open its doors to foreign investment, with last July's listing on the New York and Hong Kong stock exchanges.
China Southern's leap onto the self promotion bandwagon reflects the airline's eagerness to get up to speed with the international big boys of the airline world in terms of safety, self-image and service.
While the Guangzhou-based airline's check-in facilities at hotels, through check-in for transfer baggage and inflight entertainment may seem the norm to the western eye, for the Chinese the airline's emphasis on customer service is still as alien a concept as eating rice with a fork.
Already the fastest growing airline in China, China Southern's development is set to speed up. 'In the next 10 years, China Southern will compare to international airlines and be very modern with at least 130 aircraft. Its development will increase in speed, otherwise it will not catch up with international airlines,' declares the airline's president and chairman Capt Yu Yanen.
There is one blip in the airline's otherwise sound image, however. In May 1997, one of China Southern's Boeing 737-300s crashed during landing at Shenzhen airport, killing 35 passengers. The state-controlled Civil Aviation Administration of China has finished its investigation into the accident but has not published the findings. According to China Southern's senior adviser, Zhu de Chi, they never will. 'From our point of view, it was mainly caused by severe weather conditions,' says Zhu.
As China Southern brushes up its image, it is also taking to the markets. The airline's offering on the New York and Hong Kong stock exchanges in July 1997 reduced the CAAC's ownership to 68.1 per cent, although the CAAC still retains control and the right to appoint all the directors.
China Southern hasn't finished yet - a domestic listing is in preparation for early 1998. And Capt Yu is already planning another international listing for the airline 'in line with the company's development', hinting at 'some possible changes in Chinese government policy' which would relax the current foreign investment limit of 35 per cent and allow a further listing to take place.
The airline's total offering of 1,030 million shares in July was already the largest fund-raising exercise among China's state-owned enterprises, and raised US$630 million. Of the total, 353.5 million shares were allocated to North America, 282.8 million for non-US international investors, 290.5 million for Hong Kong corporations and 71 million for the Hong Kong retail market.
The funds raised are being used to support the company's aggressive growth plans. Some of the main uses will be US$283 million to buy new aircraft and aircraft spares; $164 million to repay outstanding debts; $12 million to expand the airline's flight simulation facilities in Zhuhai; $9 million to purchase and install a computerised financial system; and $117 million to construct airport facilities at Haikou and Zhengzhou and an air catering facility at the company's base in Hubei province, says Peter Negline of Salomon Brothers in Hong Kong.
There is a potential hiccup on the financial horizon, however, in the airline's growing debt burden which stood at US$2.3 billion in March 1997. Although the airline has the funds from the offering, it will need other sources of funding and its outstanding debts may impair its future borrowing ability and profitability.
The problem could be accentuated if the airline needs extra capital to buy small, financially weak airlines, as the stronger players in China move to snap up their more feeble counterparts in line with the industry's consolidation trend. However the airline's gearing should have dropped from 84.5 per cent in 1996 to 57.6 per cent by the end of this year, according to estimates by Salomon Brothers.
China Southern already has its eye on 'one or two airlines' says Capt Yu and 'is negotiating with another partner' to acquire the airlines at the end of the year.
The airline could also face financing problems if it opts to fund future aircraft purchases by finance lease rather than operating leases. China Southern's expansion plan for new aircraft is certainly ambitious. In June the airline introduced an Airbus A320 into its fleet of 78 aircraft - predominantly Boeing 777s, 767s, 757s and 737s. Another 10 A320s will be delivered this year, with 10 more on order up to 2000.
China Southern is also awaiting formal approval from the CAAC to order three B777s, says China Southern's chief financial officer, Liu Wen Bo.
China Southern plans to use its new B777s on its sole European service from Beijing to Amsterdam, as well as from Shanghai to Kuala Lumpur and from Guangzhou to Brisbane. The A320s, meanwhile, will be used on domestic routes and to southeast Asia.
Elsewhere, the airline has signed a codeshare with Delta Air Lines for nonstop Guangzhou-Los Angeles services. The airline is also deliberating additional codeshares, possibly with United Airlines, while 'the Chinese government is negotiating with French and other European governments for other destinations for the second half of next year', says company secretary Li Yong Zhen.
Membership agreements recently signed with international reservation systems such as Abacus, Sabre and Galileo have made ticket reservations and sales for international flights easier.
Although China Southern aims to increase capacity on international routes, the airline's future development is heavily focused on the domestic market.
Some 80 per cent of China Southern's traffic is derived from the domestic market, with 270 routes serving 68 destinations. Domestic revenues increased by 19.4 per cent to RMB4,486 million (US$542 million) in the first half of 1997 compared with the previous year, while international revenues represented only RMB596 million (US$72 million), up 13.7 per cent on 1996. The airline boasts that it is the largest Chinese carrier in terms of passengers carried, RPKs, fleet size and hours flown.
China Southern's confidence in domestic growth illustrates another startling home truth about modern China - the world's most populous nation is about to enjoy a spending power it has never known that will see its inhabitants line their pockets and take to air travel. The airline also expects Chinese citizens' greater disposable income and increasing foreign investment in China to attract more business passengers, especially on international flights. 'We now choose aircraft where we can accommodate business and first class passengers,' says Capt Yu.
While traffic growth is undoubtedly closely allied with economic growth, China Southern's 'all the eggs in one market' approach will leave it extremely exposed if the Chinese domestic market does not expand as predicted.
What's more, China Southern's domestic focus makes it more vulnerable than other Chinese carriers to the impact of CAAC measures to unify domestic fares as of July 1997. Previously, Chinese nationals had received discounts of between 20 and 60 per cent.
The unified fares should result in higher yields but depressed load factors for the airline. However, even within the regulated market, China Southern discounts local air fares and in 1996, its domestic yields were 20 per cent lower than its rival China Eastern's, points out Negline.
Capt Yu dismisses the idea that unified fares will reduce passenger numbers, predicting continued traffic growth. Yield had already increased by 9 per cent in August, he points out.
China Southern's relatively cautious approach to international services is understandable in view of Guangzhou's proximity to Hong Kong.
The airline's base within the industrial sprawl of Guangzhou, which lies on the rapidly developing Pearl River Delta region of China, may place it in prime position for future domestic growth. Guangzhou is the largest city in southern China and one of China's major gateway cities.
Yet the neon lights of Guangzhou pale in comparison with the international stage of Hong Kong, whose international traffic dwarfs that of many other international centres in Asia. Moreover, 'there is no real precedent for major international carriers to operate scheduled nonstop, direct flights into two cities that are so close together and whose economies are so highly integrated,' says Negline.
Nor will Hong Kong's return to the motherland encourage China Southern to set up a base in Hong Kong, as this would be 'too expensive' and 'unnecessary', says Capt Yu. Instead he predicts more passengers may be drawn to Guangzhou due to the expense of the new Hong Kong airport, Chep Lak Kok, from 1998.
Meanwhile, Guangzhou is busy building up its own strengths as a hub. Construction of Guangzhou's new international airport, Baiyun International, complete with three runways and two terminals, should be finished in 2003, when the old airport may close.
Alongside its main base at Guangzhou, China Southern benefits from a further nine well positioned bases in China, including Wuhan, Haikou, Zhengzhou and Shenzhen via its airline subsidiaries. China Southern owns 60 per cent stakes in four carriers: Xiamen Airlines, Shantou Airlines, Guangxi Airlines and Zhuhai Airlines, which together accounted for 29 per cent of passenger revenue in 1996.
Alongside its subsidiaries, China Southern also owns 50 per cent of Guangzhou Aircraft Maintenance and Engineering Company (Gameco), with the remainder held by Lockheed Martin and Hutchison Whampoa. As well as facilities at the new airport, Gameco plans to establish a branch at Wuhan by the end of 1998 and an engine overhaul facility by 2000.
Gameco was the first of three maintenance facilities in China to receive maintenance certification from both the FAA and the CAAC . And Capt Yu proudly points out that 'China Southern was the first airline to introduce Boeing to China and has now improved maintenance to reach international standards.'
China Southern may be turning to western aircraft, commercial techniques and investment to fuel its growth, but its future growth is heavily dependent on the development of the domestic market. 'The Chinese economy is growing very fast, with an annual increase of 8 per cent. We'll do our best to push China Southern Airlines to keep apace with this rapid development,' declares Capt Yu.
Source: Airline Business
