According to a draft listing prospectus reviewed by the South China Morning Post, the company projects 18.8 billion yuan in upgrade and expansion expenditure from this year to 2006.

The mainland carrier is budgeting 15 billion yuan to purchase 35 passenger aircraft, plus an estimated 3.8 billion yuan for spare parts and engines, investment in facilities at the new Terminal 3 of the Beijing Capital International Airport and upgrades of existing aircraft.

About 4.9 billion yuan is to be spent this year, 6.2 billion yuan next year and 7.5 billion yuan in 2006.

'We may require significant additional external financing, which may not be available on acceptable terms at all,' Air China said in a preliminary listing document.

The company hopes to raise at least US$800 million next month through the sale of 2.8 billion shares, or 30 per cent of its enlarged share capital, in Hong Kong and London.

China International Capital Corp and Merrill Lynch are arranging the dual listing.

Air China plans to spend about 4.8 billion yuan initially to acquire 10 Airbus 319 and four Boeing 737-700 aircraft, with the remainder of the proceeds earmarked for repayment of short-term debt, according to the document.

The listing document shows interest-bearing liabilities of about four times equity and a working capital deficit, or net current liabilities, of 11 billion yuan as of June 30.

High gearing is common for airlines, which must finance expensive aircraft purchases, according to an investment analyst.

'At four, its debt-to-equity ratio is lower compared to those of its rivals, which typically reach six or seven,' the analyst said.

But a closer look at the company's expected payment and repayment schedule shows that Air China is in urgent need of funds to meet its contractual obligations.

On June 30, bank lending, lease obligations, aircraft purchase and other commitments was 48 billion yuan, with about 17 billion yuan due within one year and 15 billion yuan due in one to three years.

The company had cash and cash equivalent to only 2.7 billion yuan. Net cash inflow from operating activities was about four billion yuan for 2002, 5.5 billion yuan last year and two billion yuan for the first six months this year.

The company said in the document it had secured firm commitments from its principal bankers to renew its short-term loans and had entered into loan agreements with several mainland banks to provide the finance it needed to meet future capital commitments.

'But the company will get less favourable terms for its debt refinancing amid the rate hike cycle just starting in China,' the analyst said. 'The cost of capital for the company can only go up.'

Air China's operation hub is at Beijing Capital International Airport, where it had a 42 per cent market share of passenger throughput last year. It also has about 38 per cent of the nationwide market for air cargo services.

It recorded a net profit of 499 million yuan for 2002, 159 million yuan for last year and 788 million yuan for the first half of this year on revenues of 24.9 billion yuan, 24.5 billion yuan and 15.3 billion yuan respectively. About 79 per cent of total operating revenue was generated from passenger services.

During the first six months, Air China carried about 11 million passengers and about 313,000 tonnes of cargo. It operates a fleet of 136 aircraft.