Air China Profit Slumps 77% on Fuel Costs, Cathay Pacific Loss

Air China Ltd. (601111), the nation’s biggest international carrier, said first-half profit slumped 77 percent because of slowing travel demand, higher fuel costs, and a loss from its stake in Cathay Pacific Airways Ltd. (293)

Net income in the six months ended in June fell to 944.5 million ($149 million), under international accounting standards, from 4.06 billion yuan a year earlier, the Beijing- based carrier said in a filing to Hong Kong stock exchange today. That compares with the 665 million-yuan median profit estimate of three analysts surveyed by Bloomberg News. Sales rose 5.4 percent to 47.6 billion yuan.

The carrier filled a lower percentage of seats in the first half than a year earlier as China’s cooling growth and the Euro- zone debt crisis sapped travel demand. Air China also booked losses from investment, mainly on about 30 percent stake in Cathay, and yuan’s depreciation against the dollar. Rival China Southern Airlines Co. (1055) yesterday posted a larger-than-expected 85 percent slump in profit in the period.

“It’s not surprising to see a bad first-half result because of weaker demand and fuel costs,” Kelvin Lau, a Hong Kong-based Daiwa Securities Group Inc. analyst, said before the results were announced. “Profitability will likely improve in the second half on cost-saving measures and demand recovery.”

Average Airfare

Passenger yield, a measure of average airfare, rose 3 percent in the first half. Passenger load factor, or the percentage of seats filled by paying customers, fell 0.7 percentage point to 80.04 percent as capacity expansion outpaced demand growth.

Air China fell 3.6 percent to close at HK$4.84 in Hong Kong trading today, before the earnings were released. The stock has declined 16 percent this year, compared with a 7.5 percent climb for the benchmark Hang Seng Index.

It booked a loss of 177 million yuan from stake in Cathay Pacific from a gain of 483 million yuan a year earlier. The Hong Kong-based Cathay, which also owns about 20 percent of Air China, earlier this month posted a surprise HK$935 million first-half loss. Cathay suffered a HK$300 million loss from its 49 percent stake in the cargo venture with Air China.

Fuel costs for Air China rose 13 percent to 17.8 billion yuan. Average domestic fuel prices climbed about 15 percent in the first half from a year earlier, according to China Securities Co. analyst Li Lei. The average of international jet fuel spot prices was little changed in the period, according to data compiled by Bloomberg.

50 Percent

Air China said in July that first-half earnings will likely fall more than 50 percent.

The yuan weakened 0.95 percent against the dollar in the period, the first half-yearly decline since 2009, according to the China Foreign Exchange Trade System. That compares with a 4.7 percent increase in 2011. Chinese carriers benefit from a stronger yuan as it pares the repatriated value of dollar- denominated debts used to buy planes and fuel overseas.

The company also made a 230.2 million yuan impairment for bad loan of subsidiaries.

Air China, including units Shenzhen Airlines Co. and Air Macau, introduced 23 new planes and retired 14 in the first half. It had a fleet of 441 aircraft as of June 30.

To contact the reporters on this story: Jasmine Wang in Hong Kong at Jwang513@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net

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