HONG KONG, July 22 /Xinhua-PRNewswire/ -- Xinhua Far East China Credit
Ratings today downgraded the domestic currency issuer credit rating of China
Southern Airlines Ltd ('CSA' or 'the Company', SH A: 600029; HKSE: 1055; NYSE:
ZNH) from BBB to BB+.
The downgrade is prompted by Xinhua Far East's concerns that it will be
very challenging for CSA to turn around its operations and significantly
reduce its high financial gearing amid soaring jet fuel costs (see chart 1)
and intensifying competition in China's aviation market. As such, it will be
difficult for the Company to restore its credit profile that is commensurate
with the requirements of an investment grade rating.
The Company has reported after tax net loss since financial year 2003 and
it has recently announced an earning warning that it expected to continue to
report a net loss for the first half of 2005. At the same time its peers Air
China Ltd (HKSE: 753, not rated) and China Eastern Airlines Ltd (SH A: 600115;
HKSE: 670; NYSE: CEA, BB+) managed to rebound from setbacks by SARS in 2003
and became profitable in 2004.
While CSA's acquisitions of regional airlines in 2004 reinforced its
position as the largest airline in China with the most extensive domestic
routing network, the acquisitions brought about substantial rise in debts and
financial leverage, and dragged down its operating efficiency. Including the
liabilities under financial leases, the Company's total debt increased from
RMB 18.9 billion in 2003 to RMB 35.3 billion in 2004, and further up to RMB
40.5 billion as at end of first quarter of 2005. Correspondingly, its total
debt to total capital ratio exhibited a rising trend, from 58.2% in 2003, to
71.8% in 2004 and to 74.5% as at March 31, 2005.
Despite the sharp rise in revenues by organic growth and acquisitions,
soaring jet fuel costs have considerably eroded CSA's profitability. It is
noteworthy that prevailing regulatory framework hinders CSA from fully and
immediately transferring the hikes in fuel costs to the passengers in domestic
routes. Furthermore, the progressive liberalization of China's domestic air
transportation fuels increasing competition among domestic airlines and
consequently constrains airlines' flexibility to increase airfares. Thus,
even though CSA's extensive domestic network enables it to enjoy the
burgeoning growth potentials in domestic aviation, its large exposures to
domestic routes makes it more vulnerable to increases in fuel price.
Under the backdrop of above operating challenges and a RMB 11.8 billion
capital commitment to procure 33 new aircrafts and equipment during 2005 -
2007, it will be difficult for CSA to generate adequate cash flow to reduce
its large debt burdens in next few years.
Xinhua Far East acknowledged that CSA's strategic importance to China's
aviation industry and economic development would warrant government support,
which has been proven during the SARS crisis in 2003. In Xinhua Far East's
opinion, such support against contingency mitigates the liquidity pressure on
the Company and is already factored into CSA's ratings.
China Southern Airlines Company Limited is the largest airlines in China
in terms of volume of passenger traffic, number of routes and size of aircraft
fleet. As of the year-end of 2004, the Company operated 542 routes, of which
434 were domestic, 85 were international and 23 were Hong Kong regional.
