November 29, 2004

Air China aims to save up to 1 billion yuan (USD$120.8 million) by 2007, or 2 to 3 percent of its operating costs, partly through stepped-up hedging of fuel purchases.

Investors learned of the airline's plans in its marketing of an initial public offering in Hong Kong and London worth up to USD$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 on 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 percent of its jet fuel next year, compared with 25 percent in 2004.

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

The company intends to save 200-230 million yuan in 2005 by hedging more jet fuel purchases.

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

LOWER COST

Chinese carriers have historically paid a 60-70 percent 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 percent.

"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 (USD$276.7 million) in 2004 as it recovers from the SARS epidemic of 2003.

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 percent and 13.2 percent lower than those of rivals China Eastern Airlines and China Southern Airlines, respectively.

Air China plans to use 4.8 billion yuan (USD$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 percent of its profit as dividend in the future. The company makes no dividend commitment in its prospectus.

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

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

Air China shares will begin trading on December 15.

(Reuters)