Demand finally recovers for CAL

China Airlines (華航), Taiwan's largest carrier, may say it made a profit in the second quarter as the island's economic growth prompted more people to travel.

The airline will probably post net income of NT$756 million (US$22 million), compared with a loss of NT$1.36 billion a year earlier, according to the median estimate of five analysts surveyed by Bloomberg News. China Airlines is required to report its earnings by the end of the month.

Earnings at China Air and other Asian carriers such as Singapore Airlines Ltd slumped last year as the SARS outbreak, which infected 8,098 people worldwide, put people off flying in Asia. Since then, travel demand has recovered, prompting the Taipei-based airline to add flights.

"China Air's second-quarter earnings are much better than last year because of the return of traffic after SARS," said Karen Chan, an analyst at Credit Suisse First Boston, in Hong Kong. "More people are traveling."

Taipei-based China Airlines is also trying to rebuild its reputation after one of its planes broke up in midair over the Taiwan Strait en route to Hong Kong, killing all 225 people on board. The airline was allowed to add new passenger services after having no accidents for more than a year.

In June, it introduced passenger flights to Seattle and Houston from Taipei, as well as services to Hiroshima in western Japan.

Record high fuel prices are undermining airline earnings this year. Last week, Hong Kong's Cathay Pacific Airways Ltd, Asia's sixth-largest carrier, reported net income of HK$1.77 billion ($227 million), missing analysts' forecasts of HK$2.05 billion.

Its fuel bill for the period rose 43 percent.

Crude oil for September delivery reached US$45.75 last Thursday, the highest since futures began trading in New York in 1983. Jet fuel rose to a 14-year high of US$52.07 a barrel in Singapore on Aug. 6, according to oil-pricing service Platts.

China Airlines in March said it fixed 70 percent of its fuel costs for this year to help avoid losses from increased prices.

Last year, it hedged about 60 percent of its fuel needs.

Fuel costs, which typically make up about a quarter of the airline's total expenses, have risen to more than 30 percent, according to D.C. Wang, an analyst at Yuanta Core Pacific Capital Management (元大京華投顧) in Taipei.

China Airlines is getting a boost from Taiwan's economic recovery. The government said in May it expected gross domestic product to grow 6.77 percent in the second quarter, following a 6.28 percent expansion in the first quarter.

"People are traveling more overseas for leisure, to Europe, US and Asia," said Peter Tzeng, an analyst with Polaris Securities Co (寶來證券) in Taipei.

Tzeng estimated that China Airlines will fill an average 76 percent of seats this year, up from 69 percent in 2003.

Second-quarter sales rose 59 percent from a year ago to NT$22.2 billion, the company said earlier.

China Airlines Chairman Chiang Yao-chung (江耀宗) said last month the company's first-half pretax profit was about NT$1.3 billion. The estimate means the company's second-quarter pretax profit should be about NT$552 million, based on its first-quarter earnings report. In Taiwan, some companies' net income is higher than pretax profit, because of income tax credits they receive for investment.

Increased sales in its cargo business also contributed to the company's strong earnings.