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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.

(HK Edition 08/31/2006 page3)

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