China Southern Airlines is discussing with Airbus for a possible postponement of new aircraft delivery, a source familiar with the negotiations told China Daily.

"China Southern is in talks with Airbus on putting off the dates of delivery (of new aircraft) on mutually acceptable terms," the source said. "We have not come to an agreement yet."

The Guangzhou-based carrier has booked 46 new aircraft, half of which are Airbus planes. The total contract, he said, is worth about $1 billion.

Industry experts said that the delivery rescheduling would help relieve China's cash-strapped airlines from some financial strain. They believe other airlines, including China Eastern and Shanghai Airlines, are also engaged in similar talks with Airbus.

Chinese authorities and Airbus had earlier refuted reports that aircraft orders were being cancelled. Airbus executives had even warned that buyers would have to pay a penalty if there was any delay in taking delivery of previously ordered aircraft.

"I won't expect a total withdrawal of orders, but it is likely that delivery would be delayed. This is to check the sudden influx of new planes and enormous payment," said Yao Jun, an analyst with China Merchants Securities.

The high penalty clause and the fact that Chinese carriers have already paid a hefty deposit, roughly 10 to 20 percent of total payment, makes outright cancellations very unlikely, he said.

"Among the three State-owned carriers, China Southern is the biggest buyer of aircraft from Airbus," said Li Lei, an analyst with CITIC China Securities.

Paying for these aircraft would impact Chinese airlines' already tight cash flow position, particularly China Eastern and Shanghai Airlines, which are weighed down by significant debt, he said.

"This year, we will strictly control the capacity growth of our airplane fleet. The number of new airplanes won't exceed 13," Ma Xulun, president of China Eastern, another domestic carrier, had said last month. The carrier had also announced that it would cut its annual expenditure by 3 billion yuan this year.

Analysts said delaying delivery would help utilize existing capacity better. "Even taking into account the Spring Festival travel boom, Chinese airline companies are running at less than 75 percent of their full seat kilometer utilization. Domestic carriers cannot make ends meet with idle resources," said Li.

"By delaying delivery or canceling, Chinese airline companies would have a better supply and demand situation in the aviation industry," Yao said.

Actually, China's airline firms are well placed to cope with costly orders. Mao Ang, an analyst with China Galaxy Securities, said only one in ten airplanes would be fully paid-for orders. Most of them would be quasi-purchased from international syndicates.

"This is the international convention. Similar to mortgage holders, the airline companies pay for the planes in installments from the syndicates, until they get full equity of the planes," said Mao.

As a result, the companies may not feel the pinch as much as outsiders think, Mao said.

(China Daily March 11, 2009)