* Chinese flag carrier’s HK shares fall as much as 7.4 pct
* Profits hit by higher-than-expected operating costs
* Senior exec says keeping close eye on China’s new oil futures (Adds exec comments, share price)
By Brenda Goh
SHANGHAI, March 28 (Reuters) - Air China Ltd’s shares fell sharply on Wednesday after the carrier reported an annual profit that fell short of analysts’ forecasts due to higher-than-expected operating costs.
The flag carrier’s Hong Kong shares dipped as much as 7.4 percent in their worst day since early February, while its Shanghai shares dropped nearly 5 percent.
Air China said late on Tuesday that 2017 net profit rose 6.3 percent to 7.24 billion yuan ($1.15 billion), marking its strongest profit growth since 2011. However, it fell below a 9.22 billion yuan average estimate from 17 analysts in a Thomson Reuters poll. Revenue rose 7.7 percent to 121.4 billion yuan.
The earnings were “a disappointment to the market”, BOCOM International analyst Geoffrey Cheng said in a note. “Fuel cost, aircraft and engine operating lease expenses, and repair and maintenance costs surprised us on the upside.”
The company said fuel costs jumped 29.2 percent to 6.42 billion yuan, contributing to a 15 percent rise in operating expenses.
Unlike many of their overseas peers, Chinese airlines do not hedge fuel buys after they suffered heavy losses in 2008. This helped when oil prices plunged in mid-2014 but now leaves them vulnerable as prices rise.
At a press briefing on Wednesday when asked about its interest in the newly-launched yuan-denominated oil futures, Air China’s board secretary Zhou Feng said the company has been keeping a close eye on the development, but has not yet formulated plans to use the contract to hedge its fuel costs.
Air China’s passenger yield fell 0.45 percent in 2017, even though passenger numbers were up 5.2 percent. Luo Yong, Air China’s managing director for marketing, said the firm had raised ticket prices across international and domestic routes, but was being impacted by excess capacity on certain routes.
“The main problem was operational investment into United States and Australia routes far exceeded demand growth,” he said.
“But this year, our forecast for routes to these two regions is that (the situation) has reached a very low trough so the likelihood that price levels will fall much further is not big.”
Zhou said the firm was positive on the cargo market, adding that he did not expect fears of a brewing U.S.-China trade war to impact air cargo demand. Cargo revenue jumped 23.5 percent last year.
The company also said currency fluctuations remained a risk as a 1 percent change in the yuan against the dollar could drive a 279 million yuan change in net profit.
Air China and its main rivals have taken out many dollar-denominated loans to buy aircraft, so the strengthening of the yuan has helped them cut financing costs. Its profits were helped by 2.94 billion yuan in foreign exchange gains last year.
($1 = 6.2795 Chinese yuan)
Reporting by Brenda Goh; Additional Reporting by Liu Luoyan Editing by Christopher Cushing and Subhranshu Sahu