Hong Kong (Thomson Financial) - Merrill Lynch has cut its 2007
operating profit forecast on Asian airline operators by 5 percent following
a 25 percent surge in jet fuel costs over the last three months.
While average crude oil prices in the first nine months of 2007 were lower than last year, the recent sharp increase in oil prices made fuel prices almost 30 US dollars a barrel higher than the fourth quarter of 2006, Merrill Lynch analysts said in a research note.
Operating profits at various Asian airlines grew 70 percent in the nine months ended September.
"The level of surcharge in these territories remains well below those airlines based in Southeast Asia and Australia who are generally free to adjust their levels when they wish," said Merrill Lynch analysts Paul Dewberry and YingYing Hou.
The brokerage has reduced its operating profit forecast for China Southern Airlines, the nation's largest carrier by fleet size, by 11 percent to 1.19 billion yuan.
It has reduced Cathay Pacific Airways' operating profit forecast by 7 percent to 6.78 billion Hong Kong dollars.
Merrill Lynch uses International Financial Reporting Standards (IFRS) to make their calculations, while mainland companies use Chinese Generally Accepted Accounting Principles (GAAP).
The broking house has also lowered its 2008 operating profit estimates for Asian airlines by 10 percent as it expects oil prices to average 90 US dollars a barrel next year.
Merrill Lynch has a "sell" rating on Air China and China Eastern Airlines as its views both companies as overvalued due to expectations of a possible industry restructure.
On Thursday, China Southern shares were placed in a trading halt on the stock exchange with no reason provided for the suspension.
It followed the carrier's announcement that its third quarter net profit rose 49 percent to 1.88 billion yuan as rapid economic growth on the mainland boosted demand for travel.
China Southern was among the most heavily traded stocks in Hong Kong Wednesday, rising 4.5 percent after it said it had ordered 10 Airbus A330-200 aircraft to be delivered between March 2009 and August 2010.
Air China, the nation's largest international carrier, was up 12 cents or 1 percent at 11.88 dollars.
China Eastern Airlines rose 30 cents or 3.6 percent to 8.61 dollars.