Air China to save up to US$121m by 2007
(Business Weekly)
Updated: 2004-12-08 15:26

Air China Ltd aims to save up to 1 billion yuan (US$121 million) by 2007, or 2 to 3 per cent of its operating costs, partly through stepped-up hedging of fuel purchases, fund managers said last week.

Investors learned of the airline's plans in its marketing of an initial public offering in Hong Kong and London worth up to US$1.1 billion, which is expected to draw heavy demand in a cash-rich Hong Kong market.

The state-run carrier also expects to generate savings from more efficient use of its fleet and centralized purchasing, management told a marketing luncheon last Monday, according to fund managers who were there.

The Beijing-based carrier, the biggest and last of the big three China airline companies to list, said it planned to hedge 22-50 per cent of its jet fuel next year, compared with 25 per cent in 2004, fund managers said.

Jet fuel accounted for 28 per cent of Air China's operating costs in the first half of 2004, up from 20 per cent in 2003.

The company intends to save 200-230 million yuan (US$27.71 million) in 2005 by hedging more jet fuel purchases, fund managers said.

For every US$1 increase in crude oil prices, Air China's net profit will drop more than 5 per cent, underwriter China International Capital Corp (CICC) said.

Lower cost

Chinese carriers have historically paid a 60-70 per cent domestic premium above the Singapore price on jet fuel.

However, due to this year's rapid surge in global oil prices, the current premium has narrowed to 5 per cent.

"Air China makes good profit despite the high oil price. Its earnings will improve when the oil price drops," said Apex Capital Management director Alex Au.

Air China said in its preliminary prospectus that net profit would jump 13.3 times to 2.29 billion yuan (US$276 million) in 2004 as it recovers from the deadly SARS (severe acute respiratory syndrome) epidemic of 2003.

CICC expects Air China's earnings to climb by 13 per cent to 2.6 billion yuan (US$313 million) in 2005, and by 20 per cent to 3.1 billion (US$373 million) in 2006.

Air China, the first big carrier to complete the integration of its mergers under a consolidation of China's airline industry, absorbed China Southwest Airlines and Zhejiang Airlines in 2003.

As a result, its unit costs are 3.7 per cent and 13.2 per cent lower than those of rivals China Eastern Airlines and China Southern Airlines, respectively.

Air China plans to use 4.8 billion yuan (US$580 million) of its proceeds to buy 14 planes and the remainder to repay debt.

Fund managers said the company plans to pay 10 to 15 per cent of its profit as dividend in the future. The company makes no dividend commitment in its prospectus.

The carrier is planning to increase capital spending to 23 billion yuan (US$2.78 billion) between 2004 and 2007, resulting in net cash outflows of 818 million yuan (US$98.9 million) and 580 million yuan (US$70.1 million) in 2005 and 2006, compared with a net cash inflow of 898 million yuan (US$108.19 million) in 2004.

Air China is offering 2.805 billion shares, or 31 per cent of its enlarged share capital at HK$2.35-HK$3.10 each, which is 9.96 to 13.14 times estimated 2004 earnings per share of 0.25 yuan (0.03 US cent) each.

Hong Kong's Cathay Pacific Airways will buy 905 million shares, or 32.3 per cent of the offering, with a 12-month lock-up period.

Air China shares will begin trading on December 15. Merrill Lynch is also underwriting the deal.

Bad news?

Air China Ltd said last week it was not affected by the collapse of its jet fuel supplier, China Aviation Oil (Singapore) Corp Ltd.

Beijing-backed China Aviation Oil (CAO) sought protection from creditors late last month because it could not cover US$550 million in trading losses on oil futures during last October, when global oil prices surged.

Chinese airlines have historically paid a 60-70 per cent domestic premium above the Singapore market price on jet fuel because the supply in China is monopolized by the China Aviation Oil Supply Company, the parent firm of CAO, and the carriers have limited hedging power.

"With regard to the China Aviation Oil Singapore's incident, we have made enquiries to the relevant authorities in China. Both oil supply and prices will not be affected," Chairman Li Jiaxiang told a video conference.

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