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Price cuts keep Spring in the black

By Wang Ying (China Daily)
Updated: 2009-04-24 07:48

Passengers board a Spring Airlines aircraft at the Shanghai Hongqiao International Airport. [Ren Guoqiang]

Nimble Spring Airlines is running rings around the bleeding State-owned carriers en route to a public listing at the end of this year.

The Shanghai-based budget airline is not exactly laughing all the way to the bank. But it has proven the effectiveness of its business model in the domestic market to patrons, skeptics and potential investors by posting a profit during the industry's most trying times in recent years.

Defying the industry trend, Spring Airlines posted a profit of 21.04 million yuan for 2008, down more than 50 percent from a year before. Sales amounted to 1.62 billion yuan.

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The earnings decline, analysts noted, must be seen in the context of the exceptionally difficult year marked by the soaring fuel price in the first half and tumbling passenger and cargo traffic toward the end of the year.

The profit, though modest, put the company in a shinning light against the dismal performance of its much larger competitors that enjoy all the privileges associated with their State-owned status.

China Southern Airlines, which operates the largest fleet of aircraft in the nation and is reputedly the most agile carrier, lost 4.8 billion yuan in 2008, the worst results since listing in 2003.

Air China, the nation's flag carrier, said it was 9.1 billion yuan in the red, its first annual loss since it went public in 2004.

China Eastern, the well-recognized sick man of the industry, posted a record loss of 13.92 billion yuan in 2008, earning it the ignominious designation of 'ST stock' on the Shanghai bourse.

As the money hemorrhaging continues at the three carriers, amid massive injections of fresh capital from the government, Spring Airlines announced a significant boost in profitability in the first quarter of this year, setting an upbeat tone for the whole year. The company said its earnings in the three months to March 31, amounted to 15.87 million yuan on sales of 429 million yuan.

Other than low prices, Spring Airlines also enjoys the advantage of being a member of Spring International Travel Services, one of Shanghai's leading tourist agencies, which can help ensure a reliable flow of customers to the carrier. The group, founded by its charismatic chairman, Wang Zhenghua, also owns a hotel and other tourism-related assets in Shanghai.

"The global economic downturn, to some extent, has offered low-cost airliners a bonus advantage, and probably that can explain why we made a profit last year," Wang said. "Now, cost cutting has become the catchphrase for airliners," he said. But nobody apparently can do it better than those airlines like Spring, which swear by low fares.

"Spring's business model is hard to duplicate among other carriers, but it proves highly successful," said Huang Jinxiang, analyst, Guosen Securities.

The government has reportedly tried to mitigate the fare competition that is hurting the less-efficient larger carriers by putting a cap on discounts.

Wang said he has never received any official notification about discount fares. "We have not received such notice, and before anything is confirmed, we will sell our tickets as usual," he said.

Wang obviously has more than that in mind. "We are preparing for a listing on the Shanghai bourse this year," he said. "Shanghai, being our home town, will certainly be our top choice for listing," he said.