China airlines flying high; but competition and cost concerns remain (FY2004 earnings)

China state-controlled airlines, China Eastern Airlines (ticker: CEA), and Air China, announced (WSJ subscription required) FY 2004 earnings results today. US publicly-traded China Eastern provided little information. Details:

FY 2004 Results for China Eastern Airlines:
(all percentage changes and comparisons are year on year, unless stated otherwise, assumes currency conversion of RMB 8.27: US $1)

• Revenue rose 47% to $2.54 billion.
• Net profit of $62.2 million, up from a loss of $114.8 million.

FY 2004 Results for Air China:
(all
percentage changes and comparisons are year on year, unless stated
otherwise, assumes currency conversion of RMB 8.27: US $1)

• Revenue rose 32% to $3.7 billion.
• Revenue
  passenger kilometers, the number of passengers multiplied by the
  number of kilometers they fly, rose 39%.
• Total operating costs rose 30% to
  $3.5 billion.
• Jet fuel accounted for 29% of total operating costs,
  up from 24%.

• Net profit rose 1400% to $288.8 million.
• Passenger traffic rose 36% to 24.5 million.
• Cargo traffic rose 17% to 2.58 billion metric ton kilometers.
• Air China plans to issue a 10-year bond this year valued at $362.8 million.
• Air China didn't propose a final dividend, but it plans to distribute 15%-30% of this year's net
  profit to shareholders.
• Air China holds 69% of Hong Kong-listed China National Aviation Co., a
  holding company that has equity stakes in Hong Kong carrier, Hong
  Kong Dragon Airlines, and Air Macau.
• Air China also has shares in
  Shenzhen-listed Shandong Airlines and Shenzhen Airlines.
• Hong Kong's
  dominant airline, Cathay Pacific Airways, has a 10% stake in Air
  China.

Air China President Ma Xulun:

....In 2004, the company had the best performance in its history as measured by all operating indicators.

Gary Zhang, research analyst at Sun Hung Kai Investment Services Limited:

• China Eastern bought more jet fuel from the international market than Air China.
• 30% of Air China's jet fuel last year was bought from the international market.
• Air China did a better job of hedging against the volatility of oil prices.
• An Air China official told analysts that the company booked a gain of $4.96 million in 2004 from oil-hedging activities.

Comment: Both airlines recovered nicely from the impact of severe acute respiratory syndrome (SARS) in 2003. But Air China admitted it faces challenges such as increasing competition and high jet-fuel costs. No doubt China Eastern shares the same sentiment.

China Eastern Airlines stock market performance: