If China is in the midst of an economic boom, and the Chinese are building a middle class, then it stands to reason that China's airline business must be as hot as a cheap pistol. Right?
Well, China Southern Airlines' (NYSE:ZNH) revenue certainly zoomed skyward -- by 60.8% -- for the first six months of 2005. But the company still posted an operating loss. We know that revenues got a boost from the acquisitions of China Northern Airlines and Xinjiang Airlines, but the press release doesn't say to what extent they helped. And that's part of the problem in saying just how well this company is doing: The press release is devoid of earnings projections and other hard numbers for investors to analyze.
But while there's no balance sheet or cash flow statement to look at, the company does identify that operating margins swung from a healthy 6.8% last year, when the company reported a bottom-line profit, to a negative 2.3% this year. It also acknowledges that strong competition and costs associated with fuel, maintenance, and acquisition integration culminated in the operating loss.
For some context on the numbers we do have, we can look to the competition. First, China Southern's 6.8% operating margins are exactly what Motley Fool Stock Advisor recommendation JetBlue (NASDAQ:JBLU) has had for the past 12 months -- but they fall pretty shy of the 9.8% margins at Southwest Airlines (NYSE:LUV). Second, the company reported 1.4 times interest coverage, while competitor Delta Air Lines (NYSE:DAL) for the same period comes in at negative 3.8. Those looking for the healthiest balance sheet might turn to Southwest, which posted interest coverage of 10.98 times for the same period.
The statistics above hearken to a very important fact: Southwest is one of the very few airlines that employ fuel-cost hedging, and doing so has allowed it to mitigate those costs. That's smart. Airlines burdened by heavy debt loads, in conjunction with high fuel costs, might find themselves ill-equipped to cover operating and interest expenses, and that results in high cash-burn rates or -- you guessed it -- more debt at higher rates. At least China Southern has bureaucracy working in its favor: The Chinese government has approved of fuel surcharges, which can help the airline recover some of its costs.
Given the host of concerns, the stock's roller-coaster ride over past five years and the 20% drop over the past 52 weeks are not all too surprising. Although the sole analyst who follows the company expects earnings of $1.15 per share this year (giving the stock a forward multiple of 11.8), there is little in the press release to indicate that the second half of the fiscal year will be significantly different from the first half.
China has a booming economy. But China Southern is having trouble capitalizing on that boom -- largely because of high fuel costs and competition. Until this airline can turn the corner, there is no reason to rush into the stock.
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Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Click here to see The Motley Fool's disclosure policy.
