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BIZCHINA / Oil Price Hike

Air China hamstrung by soaring oil price

By Hui Ching-hoo (HK Edition)
Updated: 2006-08-31 07:49

Due to soaring oil prices, the largest mainland carrier Air China posted
a 22.5 per cent drop in net profits to 458 million yuan in the first
half, compared with 591 million yuan a year ago.

The setback came despite that the carrier's turnover increased 17.6 per
cent to 20 billion yuan. Analysts pointed out that the carrier was long
hit by oil price hikes, and it is unlikely to recover from the downturn
soon.

"It is a tough time for the mainland aviation business," said Andes
Cheng, associated director of South China Research. "The recent fuel
surcharge can do little to offset the fuel cost as oil price keeps
lingering at a high level."

The State Council earlier had given the nod for local carriers to
increase fuel surcharge again, from 30 to 80 yuan for short-distance
flights below 800 kilometres, and from 60 to 100 yuan for long-haul
flights more than 800 kilometres. The charge will be effective from
tomorrow.

"The result of Air China matches my expectation that the high fuel costs
outstripped its passenger and cargo growth," said Casor Pang, strategist
of Sun Hung Kai Financial Group.

Pang also said that the three mainland largest carriers Air China, China
Eastern Airlines and China Southern Airlines are hardly to turn their
businesses around since fuel accounts for more than 20 per cent of their
total costs.

Air China's fuel cost accounted for 34 per cent of its overall operating
expenditure of 11.7 billion yuan at the end of 2005, rising 5.2 per cent
from the previous year.

High oil prices also dampened investors' confidence in the carrier.

Air China had to trim the size of its recent A-share IPO to 40 per cent
of what it had previously planned and offered only 1.64 billion A shares.

The only good news for Air China could be its acquisition of a 10 per
cent stake in Hong Kong's dominant carrier Cathay Pacific, analysts said.

"The deal is expected to deliver financial benefits in 2007," an analyst
said.

Its A shares performed bearishly on trading debut on August 18, with
prices once plunging below offering price of 2.8 yuan, the poorest debut
since the re-open of the A-share market in May.

Air China's H shares rose 31 per cent in the first six months of 2006,
beating a 27 per cent rise of Hong Kong's Chinese Enterprise index during
the same period. It closed at HK$2.75 yesterday, up 1.1 per cent.

(For more biz stories, please visit Industry Updates)

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