UPDATE 2-Air China sees uncertain skies ahead as Q2 soars

* Q2 net profit 1.95 bln yuan vs 240 mln yuan yr ago

* Lowers passenger, cargo targets for rest of 2009

* Shanghai-listed shares surge 10 pct, HK stock up 3.6 pct (Recasts, adds detail, bylines, HONG KONG dateline)

By Fang Yan and Nerilyn Tenorio

SHANGHAI/HONG KONG, Aug 26 (Reuters) - Air China (0753.HK), flying high on a new investment and a strong second-quarter, warned of potential weakness facing the industry as the global economic downturn continues to squeeze air and cargo traffic.

The world's largest carrier by market capitalisation trimmed its full-year passenger and cargo forecasts after fuel hedging gains helped increase its second-quarter earnings eight-fold.

The strong results helped Air China shares rally 10 percent in Shanghai (601111.SS) on Wednesday, while its Hong Kong-listed stock added 3.6 percent, both well ahead of the broader markets.

But analysts cautioned repeating such results would be tough.

"The second half may not be better than the first half," said Jim Wong, an analyst at Nomura Securities, explaining the company may not have the same fuel hedging gains or refunds on airport taxes it enjoyed in the first half.

China's airlines faced strong headwinds last year as a slowing economy hit demand for air travel, pushing the three biggest carriers into a combined loss of more than $4 billion.

Those woes are part of a global trend that has seen IATA, the voice of more than 200 airlines, repeatedly warn of a grim year for carriers as a worldwide recession and the H1N1 flu scare shrink passenger demand and weak financing hits air cargo trade.

The losses of the Chinese carriers prompted Beijing to provide big cash infusions to Air China's two rivals, China Eastern (600115.SS) (0670.HK) and China Southern (600029.SS) (1055.HK). Air China has yet to receive such a hand-out.

Domestic air traffic in China has resumed its normal growth pattern this year, as Beijing's aggressive economic stimulus package lifted consumer confidence.

H1 STRONG

Air China said it carried 19.5 million passengers in the first half, up 11 percent from a year earlier. But its cargo volume fell 16 percent as the global downturn weighed on foreign trade, it said in a statement late on Tuesday.

The country's air passenger volume rose 24.6 percent to 17.7 million in June, the fastest growth rate in at least three years, according to official data.

Air China made a net profit of 1.95 billion yuan ($285.5 million) in the second quarter, up from 240 million yuan a year ago, according to Reuters' calculations based on reported first-half earnings.

Net profit for the first half was 2.88 billion yuan versus 1.13 billion yuan a year ago, based on international accounting standards.

Air China said its fuel-hedging contracts in January-June yielded a mark-to-market gain of 1.45 billion yuan, helping offset a 12.7 percent fall in sales.

But even without those gains, Air China's core earnings rose 80 percent from a year earlier, totaling about HK$600 million, exceeding expectations, said Nomura's Wong.

Air China announced the results a week after unveiling a HK$6.3 billion deal to buy a further 12.5 percent of Cathay Pacific Airways (0293.HK), Hong Kong's flagship airline.

The purchase of the stake from CITIC Pacific (0267.HK) increased Air China's holding in Cathay to 29.99 percent, with analysts calling the move the latest step in Air China's longer-term bid to become a major global airline. [ID:nT321641]

A closer tie with Cathay, which owns 18.01 percent of Air China, will help the Chinese carrier to further expand its international routes, analysts said. ($1=6.831 Yuan) (Additional reporting by Jacqueline Wong; Editing by Doug Young and Lincoln Feast)