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DE RUEHGZ #2347/01 3330901
ZNR UUUUU ZZH
R 290901Z NOV 06
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 5514
INFO RUEHOO/CHINA POSTS COLLECTIVE
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RUCPDOC/USDOC WASHDC
RUEAIIA/CIA WASHDC
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RHHMUNA/HQ USPACOM HONOLULU HI

UNCLAS SECTION 01 OF 02 GUANGZHOU 032347 
 
SIPDIS 
 
STATE FOR EB/TRA/AN, EAP/CM 
USPACOM FOR FPA 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EAIR ECON KTIA CH
SUBJECT: China Southern Airlines: Turning a Profit but No Plans for 
New U.S. Routes 
 
REFERENCE: A) Guangzhou 11471; B) Guangzhou 8841; C) 05 Guangzhou 
32752 
 
(U) This message is sensitive but unclassified.  Please handle 
accordingly. 
 
¶1. (SBU) SUMMARY AND COMMENT:  In a November 28 meeting with the 
Consul General, China Southern Airlines President Si Xianmin 
discussed his airline's improving financial health, its relationship 
with U.S. suppliers and airlines, the state of the Chinese airline 
industry, and the recent technical test flight of an A380 in 
Guangzhou.  China Southern currently operates only one route to the 
U.S. (via Los Angeles); and previous plans to open a Beijing-New 
York route are on hold.  The company remains at the mercy of an 
inefficient fuel pricing system and faces increasing competition 
from international carriers with better brand recognition and more 
international routes.  END SUMMARY AND COMMENT. 
 
Company Overview 
---------------- 
 
¶2. (SBU) China Southern has the largest airline fleet in China and 
the most domestic routes, according to China Southern President Si 
Xianmin.  By the end of 2006, China Southern will have 300 
airplanes, of which approximately 200 are Boeing and 100 are Airbus. 
 (Si was careful to note that two-thirds of China Southern airplanes 
are Boeing.)  The airline served more than 40 million passengers in 
2005, accounting for over one-third of the China market and ranking 
10th in the world.  Si expects that China Southern will serve more 
than 50 million passengers in 2006. 
 
Financial Status 
---------------- 
 
¶3. (SBU) After reporting losses throughout 2005 and the first half 
of 2006, China Southern turned a profit in the third quarter of 
¶2006.  Si cited lower fuel prices as an important - but not the only 
- factor affecting the company's improved financial performance. 
Nevertheless, he complained that China's fuel pricing system is slow 
to react to international price declines, though quick to respond to 
increases. 
 
¶4. (SBU) Si indicated that China Southern's performance in the 
fourth quarter would not reach third-quarter levels, largely because 
of a traditional downturn in market demand during the winter season. 
 Nevertheless, he said the airline's strong presence in central and 
southern China will alleviate some of the losses from the 
less-traveled colder northeast and northwestern regions. 
 
U.S. Routes 
----------- 
 
¶5. (SBU) China Southern currently operates direct flights from 
Guangzhou to Los Angeles five days per week.  According to Mimi 
Chan, China Southern International Relations staff, the L.A. route 
continues to lose money and China Southern has no immediate plans to 
increase its frequency.  (In an April 2006 meeting, China Southern 
representatives said the airline was considering moving to seven 
flights per week by October 2006.  At the same meeting, 
representatives said the L.A. flight is usually only 65 percent full 
in contrast to 70 percent for other flights and attracts too few 
business and first class passengers. See Reftel A) 
 
¶6. (SBU) When asked about plans to offer a Beijing-New York flight 
(mentioned by China Southern representatives in the April 2006 
meeting), Si declined to comment and said the airline is moving 
cautiously because of strong competition from Air China out of 
Beijing and has not yet made a final decision. 
 
Suppliers: Boeing and GE 
------------------------ 
 
¶7. (SBU) Si emphasized that China Southern has good business 
relationships with both Boeing and GE, which produces the engines 
China Southern uses on its Boeing aircraft.  He noted that China 
Southern introduced the Boeing 737, 757, and 777 to the China market 
and ordered 10 Boeing 787 Dreamliners in 2005.  (China Southern also 
ordered six Boeing 777 cargo jets in October 2006 and 50 A320s in 
July 2006.)  Si traveled to GE headquarters in the U.S. in June 2006 
for two weeks of meetings and training, which he said has led to 
improved communication between senior management of both companies. 
 
 
GUANGZHOU 00032347  002 OF 002 
 
 
 
Working with U.S. Airlines 
-------------------------- 
 
¶8. (SBU) When asked about cooperation with U.S. airlines, Si said 
China Southern works most closely with Delta and Northwest.  (China 
Southern has a code-share agreement with Delta and a frequent-flier 
program with Northwest Airlines.)  He said China Southern has 
invited partners to invest in its cargo business.  Though three 
companies have expressed interest in cooperating on cargo flights, 
reportedly including Northwest, none have made investment offers. 
 
Competitors 
----------- 
 
¶9. (SBU) Si said the expansion of Hong Kong's Cathay Pacific 
Airlines into mainland China has increased pressure on China 
Southern and other mainland airlines.  He noted that Cathay Pacific 
has distinct advantages in pricing, international routes, and 
service.  He added that senior management from Taiwan's China Air 
recently expressed the same concerns to him. 
 
¶10. (SBU) Si doubted that China's growing number of small, private 
airlines would thrive because of problems relating to their small 
scale, poor safety management, and shortage of skilled staff.  He 
said the China market currently has room for only the three dominant 
airlines. 
 
Airbus 380 Flight to Guangzhou 
------------------------------ 
 
¶11. (SBU) China Southern is the only Chinese airline that has agreed 
to purchase the A380, with five on order.  On November 22, an A380 
landed in Guangzhou's Baiyun Airport for flight certification 
testing.  Mimi Chan told us that approximately 15 China Southern 
pilots and technicians flew with the airplane on a route that 
circled Guilin and returned to Guangzhou.  The airplane then flew to 
Shanghai and Beijing. 
 
GOLDBERG