Air China profit soars on traffic surge
(China Daily/HK Edition)
Updated: 2005-04-13 15:13

Air China, the country's flagship carrier, yesterday reported a jump in 2004 net profit of nearly 15 times, thanks to stronger passenger numbers fuelled by the mainland's soaring economy.

Air China, the last of the country's three large airline groups to list, is expected to benefit from improved efficiencies after it absorbed two smaller rivals under a broad consolidation of China's State-controlled airline industry.

"We expect the Chinese economy to continue to grow at a rapid pace, and demand for traffic to increase rapidly over the next three years with an annual growth rate of about 13-15 per cent," Ma Xulun, president of Air China told a news conference.

Shares in Air China ended unchanged at HK$2.80 ahead of its results announcement, but have dipped by 6 per cent since their IPO in December.

The country's largest passenger and cargo services provider posted a net profit of 2.39 billion yuan (US$288.6 million) for the year ended December, compared with 160 million yuan (US$19 million) in 2003 when a deadly outbreak of Severe Acute Respiratory Syndrome devastated the travel industry.

The result beat market expectations that it would post net profit of 2.3 billion yuan (US$278 million), based on the average forecast from six analysts polled by Reuters Estimates. It also topped the firm's forecast of 2.29 billion yuan (US$277 million) cited in its IPO prospectus.

Its turnover rose about 32 per cent to 30.83 billion yuan (US$3.72 billion). It moved 24.5 million passengers in 2004, nearly 36 per cent more than the previous year, and handled 17 per cent more cargo.

Turnover rose about 32 per cent to 30.83 billion yuan. Air China, which did not declare a dividend in 2004, plans to pay 15-30 per cent of its profits back to shareholders this year.

Before yesterday's results, six analysts expected the airline to post an average net profit of 2.4 billion yuan (US$290 million) in 2005 - essentially flat from its 2004 result.

"2004 result is in line with expectations, but I'm not optimistic in 2005," said Zhang Xigang, analyst at Sun Hung Kai Research. "Profit is expected to decline this year due to high jet fuel prices."

Air China, which hedged about 25 per cent of its fuel costs last year, spent 8.35 billion yuan (US$1 billion) on fuel bills in 2004, up 54 per cent from 2003. Jet fuel costs swelled to 29 per cent of the airline's total costs in 2004 from about 24 per cent the previous year.

Analysts favour Air China over rivals China Eastern and China Southern, saying the Beijing-based carrier will be the biggest beneficiary of government efforts to consolidate the sector to boost efficiency and ease competition.

Air China, which has a market share of 45 per cent in the mainland's busiest air market of Beijing, recently won approval to set up a hub in Shanghai - China Eastern's base.

Air China, trading at 11.2-11.4 times estimated 2005 earnings, is also less pricey than its two rivals, which have P/E ratios of over 14 times.

CSFB estimated that for every US$1 per barrel rise in oil prices, Air China's profit will fall by 4 per cent, compared to over 10 per cent change in those for China Southern and Eastern. Air China, which has the biggest share in international passenger traffic, is the least affected by jet fuel prices among the three carriers because it buys a bigger share of its fuel overseas where it is permitted to hedge its costs.

Chinese airlines are not allowed to hedge their domestic fuel expenses.

The firm also confirmed that it is planning to issue three billion yuan (US$362 million) in 10-year bonds this year to buy aircraft, but it refused to give a timetable.

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