100 Million Yuan Loss in Half a Year, What's the Future for China Southern A380?
By Izzie Lin, WCARN.com | Sep. 10, 2012
"The day when A380 enters the market will mark the beginning of China Southern's loss", a senior figure in the aviation industry once made the above prediction when China Southern Airlines Company Limited (CZ) took delivery of its first super jumbo from Toulouse, France in October, 2011.
Despite A380's extensive popularity worldwide, a mood of pessimism is pervasive in the Chinese market. There are worries that CZ doesn't have the capability to run such a super jumbo due to lack of management experience and the required international route network.
According to the semi-annual report for 2012 released by CZ recently, although it managed to remain profitable, the company saw the most serious decline -- down 84% year on year -- in net profit in the first half of 2012 among China's big three airlines - Air China Limited (CA), China Eastern Airlines (MU) and CZ.
When commenting on the much discussed A380 aircraft, Xie Bing, Secretary of the Board in CZ referred to it in a teleconference as a tough question but said that "the loss on the A380 services in the first half of 2012 was less than 100 million yuan", a figure way less than the previously estimated loss of 200 million yuan by investment banks.
At a time when the prospect for CZ's A380 looked quite misty, the carrier made an announcement that it will jointly operate A380 with CA on the Beijing-Paris route.
Less Than 100 Million of Loss on A380 Routes
A380 has been a bittersweet for CZ. For the moment, CZ owns three A380 aircraft, with two of them working on the Beijing-Guangzhou route and another on the Beijing-Hong Kong route.
"The Beijing-Hong Kong service is not performing very well", said Xie in the teleconference, "While the Beijing-Guangzhou route saw a load factor of less than 80%, which was in accordance with the prospection of the company. The total loss on the A380 services in the first half of the year was within 100 million yuan".
When the super jumbo was first introduced in October 2011, it once made a splash in the market. Many passengers made A380 their first choice when travelling, which resulted in an average first-class cabin load factor of 85% and 83% respectively on the round-trip Beijing-Guangzhou route. However, as the fervor over the super jumbo subsided, CZ's A380 got stuck in an embarrassing situation.
Apart from political factors, A380 does seem to have a bright future. Theoretically, A380 is configured with more than 500 seats. The average fuel consumption per seat is 15% less than the common aircraft. Once the load factor is guaranteed, A380 is practically a cash cow for airlines.
According to Richard Carcaillet, Chief Marketing Officer (CMO) of Airbus A380, for A330 series aircraft, airlines can make profit as long as the load factor reaches 70%, while for A380, the figure is only 65%.
Be that as it may, airlines are under great pressure faced with that figure. The cabin layout for CZ's A380 is 506 seats, which means that CZ can't stay profitable unless it carries more than 328 passengers in a plane, equivalent to two Boeing 737s packed to capacity.
Ice-breaking Beijing-Paris Route
For an aircraft like A380, only by operating international routes can its advantages and value be demonstrated.
Unfortunately, opening up international routes became somewhat an unreachable dream for the Guangzhou-based carrier. According to an insider from CZ, the airline has been expecting to launch international routes from Beijing, because international routes departing from Guangzhou can hardly make profit faced with the competition from its neighbor Hong Kong.
However, on top of the tight flight schedule in Beijing, CA has taken up half the international market in China. It is unlikely that it will allow its rival to share the cake.
Affected by the above mentioned factors, CZ hadn't been able to won approval to operate its A380s on international route until a few days ago, when it reached an agreement with CA under the coordination of some leaders of the Civil Aviation Administration of China (CAAC).
"We have won approval from CAAC and will jointly operate the Beijing-Paris route with Air China. The details are still under discussion", Xie announced the "exciting news" in the teleconference and added that the A380 Paris service will start operating in October.
He further disclosed that another A380 will be used to operate the Guangzhou-Los Angeles route. A380 can finally actively take part in international market, after lingering about for a while operating domestic routes.
What's the Future for CZ's A380?
The ice-breaking A380 international service means much more than the operation of an aircraft, it represents a step forward for CZ in its international strategy.
"International routes now occupy 28% of CZ's total services. We hope to increase the ratio to 30% by the end of the year", said Xie.
With an aircraft fleet of 468 aircraft, CZ is the largest airline in the country by fleet size. Yet it has long been bothered by the limitation brought by its geographical location. Domestically, it is the most seriously hit airline by high-speed railway, while internationally, oversea routes have always been its weakness.
The Beijing-Paris route is expected to deliver a turnaround for CZ. The route is now operated by Air France using Boeing 777 aircraft, with two flights a day, while CA runs a daily flight on the route also using Boeing 777 aircraft. When A380 takes the place of Boeing 777, the load factor is set to be increased by 50%.
The Beijing-Paris route transported up to 760,000 passengers in 2011 and is one of the busiest European routes. In addition, high-end customers accounted for 13% of all passengers. All these show that A380 will have a bright future.
On the other hand, CZ will take delivery of its fourth A380 in September, and the last one in January, 2013. By then, if there weren't routes on which the super jumbos can show their capabilities, they would become nightmares for CZ.
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