Air China's domestic public offering had a frosty start on the Shanghai Stock Exchange on Friday as its shares closed unchanged, reflecting the poor confidence for airline earnings and investors' fading appetite for initial public offerings (IPOs).

Shares of the nation's flagship carrier opened 0.7 percent lower than their issue price of 2.8 yuan (35 US cents), making Air China the first company to see its opening price dip below its issue price since the country resumed IPOs this year.

IPO debuts on mainland markets usually achieve at least 10 percent gains.

Analysts blamed Air China's weak performance on the gloomy outlook of the airline industry due to soaring jet fuel prices.

"Although Air China may be doing slightly better than other Chinese carriers, high oil prices are a disaster for the whole industry.

"I expect Air China's operating profits to plummet by about 40 percent this year," said Sun Zhimin, an aviation analyst with Guodu Securities.

Jet fuel prices surged more than 20 percent in the first half of the year and are likely to rise another 20 percent by the year's end, Sun said.

Spending on oil comprised 39 percent of Air China's cost last year, compared with 33 percent in 2004.

"Air China's offering price of 2.8 yuan (35 US cents) is obviously too high at this moment," Sun added.

Air China's IPO was also affected by the sluggish performance of the A-share market and investors' fading appetite for IPOs.

The market has been flooded with fresh equity since the government lifted a year-long ban on domestic IPOs in May, said Li Lei, an aviation analyst with CITIC China Securities.

"Air China's shares are unlikely to see a big plunge in the coming weeks," Li said.

The company's largest shareholder, China National Aviation Holding Co, promised it would buy back up to 600 million shares through the secondary market at a price not lower than the market price to restore Air China's A-share price.

This will happen if the market price falls below the issue price, according to the company's IPO prospectus.

"That is an extraordinary step to boost investor confidence," Li added.

He also said that Air China's pending special shareholders' meeting next Tuesday about its share swap deal with Cathay Pacific Airways and the privatization of China National Aviation Co (CNAC) might temporarily raise investors' confidence in Air China.

But Guodu Securities' Sun did not agree. "I think Air China's shares will start to drop from next week."

He estimated the carriers' shares would range between 2.3 and 2.7 yuan (29-34 US cents) in the coming weeks.

"Air China's cross-shareholding with Cathay and privatization of CNAC may contribute to its non-operating revenues.

"But operating profit is the item we care most about," Sun said.

The Hong Kong-listed carrier earlier became the first Chinese company to reduce the size of its domestic IPO after lacklustre demand from institutional investors.

The airline last week cut the offer by 39 percent, from 2.7 billion A shares to 1.639 billion shares.

(China Daily August 21, 2006)