China Southern Airlines' Profits Sink By Half Amidst Rising Oil Prices And Competition

China Southern Airlines
China Southern Airlines Flight Departing From Shenyang Osaka Kansai Int'l Airport (Photo: lasta29 / Wikimedia Commons )

China's largest carrier by fleet size has reported dismal profits for 2018. China Southern Airlines revealed in its stock exchange filing earlier in the week that it was only able to generate a net profit of US$430 million in 2018. This was a 51.43 percent drop from what it had earned in the previous year.

The net profit reported by the company in its stock exchange filing was more than what analysts had initially expected. The initial forecasts had pegged the company's net profits to be somewhere around US$560 million, which was still a 34.87 percent drop from its 2017 earnings. China Southern Airlines' revenue had risen slightly by as much as 12.38 percent to US$21.32 billion, which was still below US$21.46 billion forecasted by analysts.

The Guangzhou-based airline reasoned that the fall in its net profits was mostly due to rising competition in the space and the recent rise in oil prices. The firm, which currently has around 800 active cargo and passenger aircraft, also stated that the country's weakening currency had also played a part in its less-than-stellar report.

As for its competition, China Southern Airlines explained that China's expansion of its high-speed rail network had also eaten through its profits. According to the China Railway Corporation, it plans to greatly expand the country's high-speed railway network by to as much as 175,000 kilometers by 2025.

This is a significant increase from the 131,000 kilometers currently being actively used in the country as of 2018. Most of the China Southern Airlines' flight routes do overlap with the railway networks, which means that customers would be split between flying to their destinations and taking the train.

In addition, there has also been an increase in domestic low-cost carriers in the country. These new airlines are cutting further into the company's profits, and it seems like competition could continue to intensify as China opens its doors to more foreign-operated firms. China Southern Airlines currently flies to over 40 international destinations, but 90 percent of its flights are still domestic. The company earns 75 percent of its revenue from its domestic passengers.  

The recent trade dispute between China and the United States also hadn't helped in the company's bottom line. The company mentioned in its filing that the main drag on its business was the continually fluctuating crude oil prices, which have significantly affected the firm fuel expenses. Operating expenses had jumped by more than 21 percent when compared to the previous year as a direct result.

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