China Southern Airlines, operator of the country’s biggest aircraft fleet, is back in the market buying new planes and engines, resuming its expansion mode after putting six months of an air travel slump behind it.
The carrier is issuing up to 16 billion yuan (US$2.37 billion) of convertible bonds, using two-thirds of the proceeds to buy 11 planes, components and towards maintenance. The remainder of the funds raised will be used to buy back-up engines and replenish its liquidity, according to a statement by the airlines, based in the Guangdong provincial capital of Guangzhou.
China Southern plans to add two types of narrow-body jets to its fleet of 857 aircraft, booking two A319neo and nine A321neo planes from Airbus. The 11 new planes are expected to add 1.9 billion yuan in annual revenue, China Southern said.
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“Having more narrow-body aircraft is the future direction as large aircraft are proved not efficient enough, ” said Toliver Ma, analyst at Guotai Junan in Hong Kong. “As more newly added routes will be short distance or regional, airlines need smaller aircraft given the demand for such routes in China still have room to develop.”
The expansion by China Southern, which flies to 243 destinations in mainland China and around the world, follows the solid recovery during the “golden week” of the nation’s national day in October, the longest public holiday since the coronavirus pandemic broke out in January.
Even though the aggressive ‘fly-at-will’ promotion packages have boosted airlines’ revenue, many of them are still flying international routes – the most profitable destinations – at 10 per cent of their 2019 capacity, which compels them to tap the capital markets for capital.
China Southern, the sole operator among Chinese carriers of the A380 super jumbo by Airbus, said it’s aiming to grow into “an carrier with international scale and network,” to leverage on the potential of an aviation market where the capacity to carry passengers may grow to 1.5 billion by 2036, and the growth prospect of its home base the Greater Bay Area.
The use of the Airbus single-aisle aircraft would make up for the capacity of the 24 Boeing 737 MAX narrow-body jets grounded in China Southern’s fleet. The carrier was one of the first to ground the aircraft last year, following two back-to-back crashes within five months involving the latest version of what Boeing called the “most popular jet aircraft of all time”.
“China Southern is aiming to restructure its fleet,” said Li Hanming, an independent aviation consultant and founder of Li & Li Consultancy in Chicago. “Because the business of its domestic routes is quite stable, there’s room to buy new planes.”
Trade groups representing airlines and transport workers called for a stand-alone aid package for the US aviation industry earlier this month, which will provide another US$25 billion grants to airlines to keep paying employees through next March, according to NPR.
Around 40,000 American airline workers were furloughed in early October in the absence of extra government financial aid, after bankruptcies of some carriers such as Miami-based Miami Air International. According to the International Air Transport Association (Iata), global airlines need between US$150 billion and US$200 billion in financial bailout, while the Airlines for American trade group said in March that US carriers would need US$58 billion in aid.
China Southern’s domestic passenger capacity rose 6.6 per cent in September from last year, despite a 90 per cent plunge in its international market, according to a filing on Wednesday. Its domestic passenger volume rose 1.6 per cent from a year ago, while passenger load factor was still down in both domestic and international markets.
The convertible bond issuance could also be part of the capital injection from parent China Southern Air Holding Company or state-owned entities which pledged to inject 30 billion yuan in the state-controlled carrier’s mixed-ownership reform, said Li.
In 2019, the State-owned Assets Supervision and Administration Commission (Sasac), as well as Guangdong Hengjian Investment Holding, Guangzhou City Construction Investment Group, Shenzhen Penghang Equity Investment Fund signed the investment agreement. China Southern said it would use the capital to invest in its aviation business and serve China’s Belt and Road Initiative (BRI) and Greater Bay Area (GBA) development.
China Southern’s expansion move could give hope to plane makers which have been hit hard by the slump in global travel. Euler Hermes under Allianz predicted earlier this week that new plane deliveries of Airbus and Boeing will drop by 57 per cent and 26 per cent in 2020 and 2021.
More from South China Morning Post:
- Travellers return to the sky as China’s Covid-19 outbreak comes under control, boosting ‘golden week’ flights by 13 per cent
- China Eastern targets business travel with revamp of unlimited flights package as domestic competition intensifies
- Economy seats sell out for business-class fares as travellers fleeing a worsening Covid-19 pandemic bid for limited flights to China