China Southern, Air China Shelve Talks on Joint Airbus A380 Flights

By Joanne Chiu

HONG KONG--Citing unresolved issues, China Southern Airlines Co. (1055.HK, K3TD.SG) has shelved talks with flag carrier Air China Ltd. (0753.HK, 601111.SH) on jointly operating Airbus A380 jets on long-haul flights out of Beijing, in a sign of increasing rivalry between the nation's top state-owned carriers.

China Southern, based in the city of Guangzhou, took delivery of five A380 Superjumbos from October 2011 with expectations to expand its foothold at the Beijing airport, the nation's main international gateway and home base of Air China. No other Chinese airline has the wide-body plane on order.

Yet its hopes to expand long-haul flights from the nation's capital was met with strong regulatory resistance, and has been unable to secure the necessary rights. The Beijing government wants to prevent direct international competition between the three main state carriers, which are each based in one of China's three biggest cities, though they do compete on many domestic flights. The third carrier, China Eastern Airlines Corp. (600115.SH, 0670.HK), is based in Shanghai.

China Southern, the nation's biggest airline by fleet size, instead entered into discussions in recent months with rival Air China over the possibility for the two airlines jointly operating the A380s on key international routes, such as Beijing-Paris and Beijing-Frankfurt. However, Air China wanted only to wet lease the planes, meaning that the flag carrier would lease the A380s and flight crew from China Southern, while it would market and sell the flights only as Air China services.

"The discussions were suspended as many issues arising during the negotiations couldn't be resolved," China Southern Chief Financial Officer Xu Jiebo said Thursday. He cited one of the difficulties in jointly running the A380s is that the airlines operate from different terminals at Beijing airport, making it hard to provide seamless connections for customers.

China Southern has resorted to operating its A380s on short domestic routes, and last year began flying the jets on its Guangzhou-Los Angeles service. With the Air China talks stalled, the airline will begin a trial A380 service on the Guangzhou-Sydney run in the second half of the year, the executive said.

"We don't want to go head-to-head with Air China on European routes, and therefore we've decided to give the Sydney market a trial with the A380," Mr. Xu said. The airline already flies to Sydney on smaller aircraft.

"If demand for flights on the Guangzhou-Sydney route turns out to be weaker than expected, we could probably try to restart talks with Air China," he said. China Southern, which also flies to London from Guangzhou, wants to become a major player on the so-called "Kangaroo route," shuttling passengers between Australia and the U.K. Air China said it didn't have an immediate comment.

Separately, Mr. Xu said he expects China Southern to take delivery of the nation's first Boeing 787 Dreamliners as early as late May after the aircraft gets approval from Chinese aviation regulators.

"We could take delivery of as many as eight Boeing 787s this year, with the remaining two on order joining the fleet next year," he said.

The carrier plans to first operate the Dreamliners on key domestic routes such as Guangzhou-Beijing and Guangzhou-Shanghai, before moving them on to international services such as Guangzhou-London and Guangzhou-Vancouver.

Write to Joanne Chiu at [e-mail]

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