"Given the traffic growth potential backed by China's strong GDP growth, we still favor the Chinese airlines, with China Southern Airline and China National Aviation Corp our top picks," said Tiffany Co, vice-president for SSB's Asia Pacific equity research.

The SSB analyst also believed that China's airlines should be the least affected by the recent events because of their relatively light exposure to the US and European markets. "We do not expect fundamentals to change substantially in the near future, " Co said.

Although there are still challenges, such as high jet costs and excess capacity, the operating environment could improve in the long term, she said.

The SSB's analyst also assumed that China Southern Airline will grow its overall traffic by 14.4 percent in 2002 given that China' s WTO entry should stimulate more foreign air travel into China.

China National Aviation Corp is financially strong, Co said, adding that she estimates it is in a net cash position. "Its strong balance sheet should help it weather the economic downturn, " she added.

But China Eastern Airline's strong exposure to the country and passenger aviation market should make it more resilient to the global airline industry downturn, the analyst noted. The airline generates 77 percent of its revenues from the mainland domestic market and 88 percent from passenger services.

She believed that the airline's larger international and cargo exposure make it more vulnerable to the global economic downturn, which has worsened since September 11.

Speaking of the Asia airline industry as a whole, Co said she expects Asian airlines will reduce capacity by around 5 to 10 percent, on the assumption that overall traffic will slow by around 5 percent for them because of the recent events in the United States and subsequent military action.

(People's Daily 10/15/2001)