China Southern orders 80 Airbus A320 planes

China Southern Airlines, which has the biggest fleet of aircraft in China, on Friday ordered 80 medium-haul Airbus A320 planes with a list value of $7.9 billion, Airbus said.

The deal, worth a headline equivalent of 5.8 billion euros, is for 30 of the existing models of the A320 and for 50 of the more energy-efficient A320Neo planes, Airbus said.

China Southern Airlines, in a statement to the Hong Kong stock exchange, said that it had obtained a discount from the list prices, as is usual in the airline industry.

The aircraft are to be delivered from 2016 to 2020.

China Southern Airlines already has a fleet of 249 Airbus aircraft, including five superjumbo A380 planes.

The airline, in its stock market statement, said that the latest planes ordered would increase its capacity as measured by tonnes carried per kilometre by 12.0 percent.

Airliner manufacturers, principally Airbus and its US rival Boeing, took bumper orders for new aircraft last year as airlines looked to renew their fleets after the financial crisis, and to gear up for forecast strong growth in airline traffic, particularly in emerging markets, in Asia and in China.

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China Southern Airlines issues profit warning

China Southern Airlines, the country's largest carrier by fleet size, warned of a loss of more than $50 million in the first three months of the year as it was hit by exchange losses caused by a weaker yuan.

In a filing to the Hong Kong Stock Exchange the firm said it would lose 300-350 million yuan ($48.2-$56.3 million) in January-March. That compares with a net profit of 57 million yuan in the same period last year, the filing said.

"The financial expenses of the company substantially increased as compared with the corresponding period of 2013 due to the exchange losses... resulting from the substantial depreciation of renminbi," the company said.

The yuan -- which China's central bank allows to rise and fall only within a controlled band -- slid in March its lowest level against the dollar in nearly 13 months. Analysts have said Beijing has moved to weaken the currency to control speculative funds betting on its continued rise.

The US Treasury on Tuesday warned that the recent fall of yuan could "raise particularly serious concerns" if it represents a reversal in Beijing's commitment to a more free-floating currency. However, it did say China was not a manipulator.

A weak yuan adds pressure to the bottom lines of Chinese airlines that depend on debt measured in foreign currencies, particularly in US dollars, to finance purchases of new aircraft.

China Southern's Hong Kong-listed shares were down 1.62 percent at HK$2.43 in by the break on Wednesday, while the benchmark Hang Seng Index was up 0.63 percent.

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Airlines increase baggage allowance: worth the weight?

Hot on the heels of Emirates and Qantas Airways, legacy carriers like Singapore Airlines and Garuda Indonesia recently announced a 10-kilogramme extra baggage allowance for passengers across all classes.

While analysts say other carriers might soon be pressured to do the same in order to keep up, at the end of the day, it still comes down to dollars and cents.

Asia Pacific airlines are hoping to hit the sweet spot with more customers by upping the baggage allowance, starting from at least an extra seven kilogrammes in economy class.

Qatar Airways also added an extra seven kilogrammes for its economy class passengers, from 23 to 30 kilogrammes in September 2013. Emirates extended the baggage allowance in 2009 and Etihad Airways upped theirs in 2012.

"It's ironic that many of these legacy carriers that have been picky with passengers for being overweight in terms of their baggage and suddenly, because of the intense competition from low-cost carriers, they're saying ‘here's another 10-kilogramme allowance’. I don't think it will make much of a difference," said Shukor Yusof, an analyst at Standard & Poor’s capital IQ.

"Most people travelling nowadays travel very lightly. They don't need a lot of baggage. But if you're allowing 10 kilogrammes, I think it is negligible. In the whole context of whether it is going to increase your bottom-line, I don't think it will have any impact at all. What will impact is whether or not fuel prices will stay low."

Travellers typically have to pay for checked-in baggage in a low-cost carrier (LCC). But that playing field is changing with the likes of Thai domestic LCCs such as Nok Air and Thai Lion Air that offer free 15-kilogramme baggage limits, effectively competing with the free 20-kilogramme allowance offered by most legacy carriers.

Besides Garuda Indonesia, Singapore Airlines and Malaysia Airlines, China Southern Airlines and Qantas Airways have also increased their baggage allowance for their customers on certain routes.

But analysts say this will not go very far in terms of increasing the airlines' bottom-line. Rather, they say these full serviced carriers should work on enhancing other product offerings to stand out from the competition.

“There are many other ways to compete. In-flight entertainment is one, more comfortable seating is another, greater choice in terms of selection of the type of services that you want and the type that you don't need, and this should result in a lower-price ticket,” said Paul Ng, global head of aviation at Stephenson Harwood.

"For SIA, they already provide the best service in economy in the region; you've got food, drink service, excellent in-flight entertainment,” said Greg Waldron, Asia managing editor at Flight Global.

“Unfortunately a lot of the time when people choose air tickets, they choose to buy on price and that's always going to be a challenge for airlines like this. You can always throw things at the customer but it's always going to come back to people's wallets. "

Baggage and ticket prices aside, experts say it all boils down to the cost of fuel that will ultimately affect the airlines' bottom-line. 

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China Southern to buy 10 A330-300 aircraft

China Southern Airlines, the country's largest airline by fleet size, said Wednesday it will buy 10 Airbus A330-300 aircraft in a deal worth $1.88 billion at list price to boost its capacity.

The airline said the acquisition will "facilitate the strategic change and the internationalisation of the company", the firm said in a statement to the Hong Kong stock exchange where it is listed.

"The Airbus aircraft will be delivered in stages to the company during the period commencing from 2014 to 2016," the airline said, adding that the acquisition will be financed through internal resources and bank loans.

The airline said the purchase will enhance its "competitiveness" and increase the carrier's available tonne kilometre -- a measurement for airline capacity -- by 5.7 percent, when the new aircraft are delivered.

China Southern Airlines did not announce the actual price it was paying for the 10 aircraft, which are worth a total of $1.88 billion at list price, apart from saying it received "certain price concessions" from Airbus.

Airlines usually get discounts from plane-makers for large orders.

The deal came two weeks after rival China Eastern Airlines, a smaller Shanghai-based carrier, ordered 60 Airbus A320 in a deal worth $5.39 billion to satisfy the country's booming domestic travel demand.

Air travel demand in China has increased in line with the country's decades of surging economic growth that have made it the world's second-biggest economy and seen its increasingly wealthy consumers take to the skies.

An industry body said in November that China will need 4,960 commercial planes over the next 20 years at a total of $563 billion, as demand for air travel is expected to soar.

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Competition heating up in China. Orders are coming in flick and fast.

Singapore Air May Seek Asia Deals After Virgin Stake Sale

Singapore Airlines Ltd. (SIA) could revisit plans for China or India investments after adding to aviation’s biggest cash pile through the possible sale of a stake in Virgin Atlantic.

The carrier has $3.4 billion of net cash, according to data compiled by Bloomberg, enough to buy eight Airbus SAS A380s at list prices. That means it could use funds from a Virgin stake sale for investments in the world’s two most populous nations or to pay a special dividend, said Paul Yong, director of research at Singapore-based DBS Vickers Securities.

“They’d be looking at mergers and acquisitions with or without this deal,” he said. “But if it does go through, their war chest will be beefed up significantly.”

Singapore Air said this week it’s in talks to sell its 49 percent share of Virgin Atlantic as competition from Middle East carriers and slower growth in Europe and the U.S. hit long-haul travel. The carrier is instead focusing on growth in the Asia- Pacific region, buying a stake in Virgin Australia Holdings Ltd. (VAH) and adding new planes for regional routes.

The Virgin sale “seems to point to some further corporate activity,” said Andrew Orchard, an analyst with CIMB Securities Hong Kong Ltd. “They don’t need the cash.”

China Eastern

The airline could look to raise its stake in Virgin Australia or try to revive plans for an investment in China Eastern Airlines Cop., he said. Singapore Air tried to buy a stake in the carrier with parent Temasek Holdings Pte. about five years ago. The offer was ultimately vetoed by the Shanghai- based airline’s minority shareholders.

Singapore Air, the world’s second-biggest by market value, can’t comment on potential investments while the Virgin stake sale is being discussed, said Germaine Shen, a spokeswoman. The airline is “very open” to investment opportunities in growth areas, including India, China and Southeast Asia, Chief Executive Officer Goh Choon Phong told investors last month.

Delta Air Lines Inc. is interested in buying the Virgin Atlantic stake, possibly with partner Air France-KLM Group, two people familiar with the matter said this week. The U.K. carrier’s billionaire founder Richard Branson will probably retain a majority share, Virgin Atlantic Chief Executive Officer Steve Ridgway said Dec. 3.

Singapore Air may look again at China Eastern or possibly China Southern Airlines Co. because of the country’s travel growth, DBS Vickers’s Yong said. The carrier already has a stake in China Eastern-controlled China Cargo Airlines. China Eastern Chairman Liu Shaoyong has repeatedly said that the carrier is still open to selling a stake to a strategic investor.
India Investments

Singapore Air could also look for a deal in India following a recent loosening of foreign-investment rules, Yong said. The country’s passenger numbers could triple to 452 million a year by 2020, according to a March study by CAPA Centre for Aviation and SITA.

Still, Indian carriers have struggled to turn rising demand into profit because of price wars, high fuel taxes and competition from state-owned Air India. Kingfisher Airlines Ltd., which has said it’s seeking overseas investors, halted flights in October because of a cash shortage.

“You wouldn’t need much cash to be buying your way into India, but you’d probably be buying more trouble than it was worth,” said Peter Harbison, executive chairman of CAPA Centre for Aviation, which advises airlines.

Jet Airways (India) Ltd., the nation’s biggest carrier, is close to selling a 24 percent stake to Abu Dhabi-based Etihad, raising about 16 billion rupees ($290 million), an Indian government official said this week. He declined to be identified, citing rules. Etihad is assessing possible investments in one or two Indian carriers as well as looking at China, CEO James Hogan said in a Dec. 3 interview.

Singapore Air in 2000 made a joint bid with Tata Group for a 40 percent stake in Air India. It abandoned the effort about 10 months later, partly because of political opposition.

Virgin Australia

The Singaporean carrier is more likely to boost its stake in Virgin Australia than investing in India, Harbison said. The airline bought 10 percent of Virgin Australia, the nation’s second-biggest carrier, for A$105 million ($110 million) last month to help provide traffic for its hub.

“I’d be surprised if they didn’t go to 20 percent,” Harbison said. Branson’s Virgin Group holds 24 percent of Brisbane-based Virgin Australia, Air New Zealand Ltd. owns 19 percent and Etihad holds 9 percent, according to data compiled by Bloomberg.

Overseas Failures

Singapore Air’s previous overseas investments have failed to pay off. The airline bought the Virgin stake for 600 million pounds in 1999, or about $970 million at the time. It subsequently wrote off goodwill amounting to about 96 percent of the purchase price, according to spokeswoman Shen.

The carrier bought a 25 percent of Air NZ in 2000. That investment was written down after the New Zealand carrier sought a government bailout following the collapse of Australian unit Ansett Holdings Ltd. The stake was later sold.

Singapore Air has traditionally maintained a net cash position, with more cash in hand than debt. It’s only failed to achieve this in its year-end accounts three times since 1990, according to data compiled by Bloomberg. The last time was in the year ended March 2004. Japan Airlines Co. (9201) has the second- biggest net cash position among carriers worldwide with $775 million, about a quarter of Singapore Air’s tally, the data show.

The size of the cash holding has depressed Singapore Air’s return on equity, a measure of profitability. It had the fourth- lowest among the 27 carriers worth more than $1 billion that made a profit last year, according to data compiled by Bloomberg.

Special Dividend

The airline may use some of its cash for a special dividend. It gave shareholders an 80 Singaporean cents extra payout last year, and one of 54 cents in 2007, according to data compiled by Bloomberg. It also span off its ground-handling unit by giving stock to investors in 2009.

“If they have excess cash flow it should go back to the shareholders,” said Kelvin Lau, an analyst at Daiwa Capital Markets HK Ltd. “They are not really running out.”

Singapore Air may also decide to use its money to help fund existing growth plans rather than for overseas deals, said CIMB’s Orchard. It provisionally ordered five A380s and 20 A350-900s, worth $7.5 billion at list prices in October. Regional arm SilkAir agreed to order 54 Boeing Co. 737 planes in August to more than double the size of its fleet.

Long-haul budget arm Scoot Pte., which began flights this year, is also holding orders for 20 Boeing 787s. The unit joined regional low-cost affiliate Tiger Airways Holdings Ltd., SilkAir and the main Singapore Air business in the company’s portfolio.

“They’ve got four carriers as it is, so their hands are pretty full,” Orchard said. “Do they really want another transaction at this time?”

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The big headache here for SIA is to decide how to use that extra cash after selling their stake in Virgin Atlantic. Reinvest in India and China, or mind its own business, literally, and focus on its own portfolio in Scoot, SilkAir and Tiger Airways?