Shanghai-based China Eastern Airlines yesterday posted a net profit of 586 million yuan for 2007 compared with a 2.99 billion yuan loss the year before.

News of the company's turnaround pushed its A share up 2.78 percent to close at 11.46 yuan.

In its annual report to the Shanghai Stock Exchange, China Eastern said revenue from aviation business was up 13.92 percent from 2006 to 43.529 billion yuan. Revenue from domestic air routes rose 19 percent from 2006 to 23.9 billion yuan, and that from international air routes was up 20 percent to 12.3 billion yuan.

It attributed the growth in revenue to the enhancement in transportation capacity, increase in aircraft utilization ratio and fuel surcharge.

The effect of the US-led global economic slowdown in the second half of last year on corporate earnings was mixed, the report said.

China Eastern has benefited from reduced debt because of the depreciation of the US dollar against the renminbi. But the company was hit by soaring oil prices, resulting in a sharp increase in fuel costs.

The annual report showed the company's operating cost was 37.6 billion yuan, up 7 percent from 2006. The cost of aviation fuel, which accounts for 40.9 percent of the total cost, rose 11.69 percent to 15.12 billion yuan.

China Eastern's revenue in Hong Kong routes dropped 13 percent to 2.355 billion yuan because of fierce competition.

China Eastern said the transport turnover is expected to be 8.767 billion ton km, passenger turnover, 42.95 million and cargo turnover to be 1.07 million tons by the end of 2008.

The company said eight A320s, five A321s, one A330-200, three A330-300s, one B737-700 and one B737-800 will be delivered to the group and put into operation this year.

Despite the turnaround in earnings, Citigroup and China International Capital Corporation Limited (CICC) have both downgraded their ratings for the company.

"With March traffic being weaker across the board for Chinese airlines, any softening in the industry upcycle would be most negative for China Eastern's earnings owing to its low-end market segmentation," said a Citigroup report, which downgraded China Eastern's H shares to "hold".

"The company's earnings per share of 0.12 yuan is lower than previously predicted. In addition, the uncertainties in the aviation industry and delay of mergers and acquisitions hit corporate earnings expectations, though its earnings in the first quarter is still expected to be sound because of currency appreciation," said a CICC report.

China Eastern's H share plunged nearly 6 percent to close at HK$3.22 yesterday.

(China Daily April 16, 2008)