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Air China doubles profit on fuel-hedging; sales fall
Published on: 2009-08-26
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Aug. 26 (Bloomberg) -- Air China Ltd., the world’s biggest carrier by market value, more than doubled first-half profit as fuel-hedging gains offset plunging international travel.

Net income surged to 2.88 billion yuan ($422 million) from 1.23 billion yuan a year earlier, the carrier said in a Hong Kong stock exchange statement late yesterday. Sales fell 9.6 percent to 23.1 billion yuan.

A 1.5 billion yuan paper profit from fuel hedging helped Air China weather a 10 percent drop in international passenger numbers amid the global recession and concerns about swine flu. The carrier, which last week agreed to raise its stake in Cathay Pacific Airways Ltd., also said that rising domestic competition will damp yields for the rest of the year.

“Chinese airlines have had to turn to the domestic market to seek growth,” said Li Lei, an analyst at China Securities Co. in Beijing. “That’s helped offset the traffic fall on overseas routes, but added to competition on internal routes.”

Air China, the nation’s largest international carrier, rose as much as 3.4 percent in Hong Kong trading and was up 0.7 percent at HK$4.51 as of 10:19 a.m. In Shanghai, the airline gained as much as 4.9 percent to 7.55 yuan.

The carrier posted a first-half operating profit of 2.8 billion yuan, compared with an 837 million yuan loss a year earlier. Fuel costs fell to 6.1 billion yuan from 10.6 billion yuan.

Profit Forecast

The airline was raised to “buy” from “outperform” at Shenyin & Wanguo Securities Co. The brokerage said the carrier will boost profit for the next three years, helped by its Beijing base and larger Cathay stake.

“The stock is entering an area with investment values even in the slow season of the fourth quarter,” Li Shurong, a Shanghai-based Shenyin Wanguo analyst wrote in a report today.

The airline and its Air Macau unit boosted domestic passenger numbers 18 percent to 15.8 million. Total passenger numbers rose 11 percent to 19.5 million, including 2.6 million on international routes and 1.1 million on Hong Kong, Taiwan and Macau flights.

Route Cuts

The Beijing-based carrier said it had postponed the resumption of flights to Sao Paulo, Brazil and axed services to Athens. Flights from other Chinese cities to South Korea have also been curtailed. A year earlier, domestic travel was hit by nationwide snowstorms, the Sichuan province earthquake and by tighter security in the build-up to the Beijing Olympics.

The carrier lowered its full-year passenger-numbers forecast to 39.7 million from 40.1 million previously, according to a statement filed to the Shanghai stock exchange. The cargo target was cut to 967,000 tons from 1.01 million tons.

Higher oil prices and fluctuating interest rates will increase the difficulty of the group’s operations, the carrier said in the Hong Kong statement.

Air China has agreed to spend HK$6.3 billion ($813 million) raising its stake in Cathay, Hong Kong’s biggest carrier, to 30 percent from 17.5 percent. The carrier turned to Cathay after attempts to gain a foothold in Shanghai were thwarted by a planned combination between China Eastern and Shanghai Airlines Co., the city’s two biggest carriers.

Cathay has said that it doesn’t plan to increase its 18 percent stake in Air China. The mainland carrier operated a fleet of 255 planes as of the end of June, including Air Macau and Air China Cargo.

Air China made hedging gains after the price of oil jumped 57 percent in the first half. The airline slumped to a 9.26 billion yuan annual loss last year, its first since listing in 2004, on plunging global travel and 7.47 billion yuan in unrealized losses from fuel hedging. Cathay and China Eastern also reported 2008 hedging losses after oil prices fell 69 percent in less than six months.

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