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Air China's Profit Drops 25 Percent as Fuel Rises

Air China Ltd., the country's biggest airline, reported a larger-than-expected 25 percent decline in first-half profit, after the cost of jet fuel increased.

 

Net income dropped to 591.3 million yuan (US$73 million), or 0.06 yuan a share, from last year's 788.4 million yuan, or 0.12 yuan a share, the Beijing-based carrier said Tuesday.

 

That's worse than the 623 million yuan expected in a median estimate by three analysts. Sales rose 15 percent to 16.9 billion yuan, from last year's restated 14.8 billion yuan.

 

Higher fuel prices are eroding earnings at Singapore Airlines Ltd. and Cathay Pacific Airways Ltd., and leading to losses at some Asian carriers including Japan Airlines Corp. Air China and other Chinese airlines are squeezed particularly hard because domestic fares and fuel prices are regulated.

 

"The government sets controls on fuel as part of macro policy, so that's a problem for the airlines," said Renee Hung, who declined to say if she holds Chinese airline shares in the US$2.4 billion of Asian equities she helps manage for Value Partners Ltd. in Hong Kong. "Ticket prices are also controlled to some extent." The airline didn't pay a first-half dividend and didn't provide quarterly results.

 

Air China, China Southern Airlines Co. and the nation's other carriers have to buy fuel from government-approved suppliers in the domestic market.

 

China's airlines now pay 5,220 yuan for each metric ton of jet fuel, equivalent to about US$81 per barrel. They can buy fuel on the open market when they fly outside the country, a practice that benefits Air China because it has more international destinations that its rivals.

 

"Air China fares better because of its international routes," said Liu Yang, who holds Air China shares in the US$1.8 billion of Asian stock she helps manage at Atlantis Investment Management in Hong Kong. Air China flew 12.6 million travelers in the first half, 13 percent more than a year earlier.

 

(Shenzhen Daily September 8, 2005)

 

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