VZCZCXYZ0013
RR RUEHWEB

DE RUEHGZ #1471/01 1030750
ZNR UUUUU ZZH (CCY TEXT ADB7BA14 MSI7404)
R 120721Z APR 06
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 4839
INFO RUEHOO/CHINA POSTS COLLECTIVE
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RUCPDOC/USDOC WASHDC
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC
RHHMUNA/HQ USPACOM HONOLULU HI

UNCLAS GUANGZHOU 011471 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EB/TRA/AN, EAP/CM 
STATE PASS USTR STRATFORD 
USDOC FOR 4420/ITA/MAC/MCQUEEN, CELICO, DAS LEVINE 
USPACOM FOR FPA 
 
C O R R E C T E D  C O P Y  (TEXT) 
 
E.O. 12958: N/A 
TAGS: EAIR ECON KTIA CH
SUBJECT: China Southern Airlines Wary of U.S. Competition 
 
REFERENCE: A) Beijing 6841; B) Guangzhou 8841; C) 05 
Guangzhou 32752 
 
(U) This message is sensitive but unclassified.  Please 
handle accordingly. 
 
¶1. (SBU) Summary: In the lead-up to the U.S.-China aviation 
talks on April 19-20, China Southern Airlines is in a weak 
financial position and would not want any U.S. airlines 
competing directly against it.  China Southern is resigned 
to a gradual expansion of its U.S. routes because of 
continued losses resulting from high fuel prices, a 
competitive domestic market, and low yields on its existing 
China-U.S. passenger route.  Short-term plans include 
expanding the frequency of the airline's Guangzhou-Los 
Angeles flight from five to seven per week by October 2006 
and possibly adding a Beijing-New York flight in 2007.  End 
Summary. 
 
¶2. (SBU) On April 11, Econoff visited the Guangzhou 
headquarters of China Southern Airlines and met with Zhang 
Lin, vice director general of the Commercial Steering 
Committee; Li Yong Zhen, general manager of the Planning and 
Development Department; and Zeng Min, director of industry 
and alliances of the Network Planning Office. 
 
Upcoming Aviation Talks 
----------------------- 
 
¶3. (SBU) China Southern representatives said they will 
closely follow the U.S.-China aviation talks next week, but 
are not personally engaged with the Civil Aviation 
Administration of China (CAAC) on the matter.  They deferred 
to CAAC on the specifics of China's position.  Nevertheless, 
they expressed concern that U.S. airlines, with lower fuel 
costs and better brand recognition, would be highly 
competitive in U.S.-China routes. 
 
Guangzhou-L.A. Route is a Money-Loser 
--------------------------------------- 
 
¶4. (SBU) China Southern currently operates five flights per 
week from Guangzhou to Los Angeles, the company's only China- 
U.S. route.  According to Zhang, this route does not earn a 
profit because the tickets are largely low yield.  U.S. and 
other international carriers attract first-class and 
business-class passengers because of their brand recognition 
and their established routes through Hong Kong and Japan. 
In addition, the Guangzhou-L.A. flights are on average only 
65 percent full, while the average China Southern flight has 
70 percent capacity.  Nevertheless, China Southern plans to 
expand the frequency of the Guangzhou-L.A. flights from five 
to seven per week by October 2006. 
 
¶5. (SBU) China Southern also has two cargo flights per week, 
from Shenzhen to Chicago.  Li complained that these are also 
unprofitable because the planes are rarely full on the 
return trips to China.  He added that China Southern plans 
to convert its cargo airline into an independent entity next 
year, citing the example of China Eastern (which leads the 
domestic air cargo market). 
 
¶6. (SBU) When asked about possible new China-U.S. routes, 
Zhang said China Southern is considering adding a Beijing- 
New York flight in 2006.  (Note: At this point in the 
meeting, the representatives talked amongst themselves in 
Mandarin.  Li quipped "We'll just lose more money," to which 
Zhang replied, "We've got the planes, we have to fly them." 
End note.) 
 
Business is Bad 
--------------- 
 
¶7. (SBU) In an earnings report to be released next week, 
China Southern will report losses for 2005, according to the 
representatives.  (The company reported a net loss of RMB 
907 million (USD 110 million) for the first half of 2005.) 
The representatives blamed the losses largely on high fuel 
costs.  Forty percent of the company's expenditures are on 
jet fuel, up from 33 percent last year, according to Zeng. 
Last November, a China Southern board member complained to 
Congenoffs that Chinese airlines pay twice the price that 
American airlines pay for jet fuel (Reftel C).  The board 
member said that only 20 percent of U.S. airline 
expenditures are on fuel. 
 
¶8. (SBU) When asked about its management structure, Li said 
China Southern is run like a public enterprise and the board 
makes key decisions (the company is listed in New York, Hong 
Kong, and Shanghai).  Nevertheless, the Chinese government 
is the primary stakeholder, and the government continues to 
have a "great impact on decision-making."  For example, in 
connection with Hu Jintao's visit to the United States this 
month, Zhang said China Southern will announce the purchase 
of 30 Boeing aircraft. 
 
On Mergers 
---------- 
 
¶9. (SBU) The representatives insisted that the company has 
no plans to merge with other Chinese airlines, and said any 
information to the contrary is rumor.  Zhang said CAAC would 
never approve a merger between China Southern and Air China 
because of monopoly concerns.  He said that in 1998, when 
China Southern and Air China were talking to each other 
about a possible merger, CAAC quickly put a stop to 
discussions.  He said the same reasoning applies today. 
Following up, Zhang expressed concern about the possibility 
of several major U.S. airlines merging into a 
"supercarrier." 
 
Comment 
------- 
 
¶10. (SBU) The representatives were noticeably downbeat about 
the company's financial health.  At one point, Li remarked 
"We work for the oil companies and banks."  Though they are 
intent on gradually becoming a strong global competitor, 
their first priority seems to be figuring out how to make a 
profit.  This is particularly true for the existing 
Guangzhou-L.A. flight. 
 
¶10. (SBU) U.S. airlines are making slow inroads into 
Guangzhou.  China Southern has a code-sharing agreement with 
Delta, and Zeng said they are in discussions with 
Continental about similar cooperation.  China Southern has a 
frequent-flier program with Northwest Airlines.  Since it 
thus far has no presence in Guangzhou, United is probably 
the most eager of the U.S. airlines to expand into the 
Guangzhou market, but it may also be that United is one U.S. 
airline that China Southern is eager not to let in if at all 
possible. 
 
DONG