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Morningstar | China Southern Airlines Posted Solid 3Q on Stable Pricing and Effective Cost Controls; FVE Intact

No-moat China Southern Airlines reported third-quarter results that featured solid revenue growth, but higher fuel cost weighed on profitability. Third-quarter profit was also dragged down by currency losses and came in at CNY 3.3 billion. The group’s average ticket yield posted 3.3% growth amid capacity expansion, and steady demand for air travel in China indicates likely solid top-line growth ahead. We maintain our fair value estimate for China Southern Airlines at HKD 7.8.

On the passenger side, the carrier posted strong revenue growth for all three of its major operating regions. Strong growth was primarily driven by 14% capacity expansion, namely the introduction of new routes and increased frequencies on existing routes. Despite added routes, passenger load factor also posted a decent increase of 2.1%, demonstrating the carrier’s ability to fill new seats. Going forward, the company’s focus for its passenger operation will be to add some capacity while maintaining current yield.

On the cost side, we still see cost-cutting efforts bearing fruit. Although a surging oil price drove fuel cost up by 48%, the group’s operating costs per revenue tonne kilometers excluding fuel dropped by 2.7% year over year. While optimistic in the carrier’s devotion to cut costs, we continue to think the long-term positive impact on the bottom line will be somewhat muted, as some of the cost savings will inevitably be passed onto the end consumers, given that the airline operates in an industry that is highly exposed to low switching costs and price transparency.

Lastly, the company’s U.S.-dollar-denominated debt ratio narrowed further to 24%, and China-yuan-denominated debt makes up around 70% of total debt outstanding. The company’s management now targets to lower its foreign currency denominated debt to 20% by the end of 2018.