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Airline stocks rise as fuel costs drop

PUBLISHED : Wednesday, 19 September, 2012, 12:00am
UPDATED : Wednesday, 19 September, 2012, 6:27pm

Airlines stocks took flight after international oil prices fell unexpectedly, helping carriers trim high fuel costs.

China Eastern Airlines closed 3.5 per cent up at HK$2.37 yesterday, while Air China rose 2.2 per cent to HK$4.67 after the Brent Oil price dropped nearly US$4 a barrel within just a few minutes on Monday night. Cathay Pacific Airways closed 1.9 per cent higher at HK$13.12, while China Southern Airlines increased 1.2 per cent to HK$3.29.

Brent has risen 30 per cent to around US$117 from around US$90 in late June even after this week's decline.

Jet fuel costs make up at least 40 per cent of airlines' operating costs, but the increase in fuel cost can only be partially passed on to the passengers through fuel surcharges.

PetroChina, the nation's largest oil producer, saw its share price end yesterday 0.4 per cent lower at HK$9.95 in Hong Kong, while that of the nation's dominant offshore oil producer, CNOOC, dropped 1.4 per cent to HK$16.02.

China Petroleum & Chemical (Sinopec), the nation's second largest oil producer and the world's second largest oil refiner, slid 0.8 per cent to HK$7.13.

CNOOC's profitability and share price tend to follow closely the price of crude oil, since it is a pure oil and gas producer.

PetroChina and Sinopec, both of which have major oil refining operations, frequently see the benefit of higher crude prices on oil production substantially offset by lower profits in oil refining. This is because domestic retail fuel prices are regulated by the government, which tends to lift them by less than the increases in crude prices, in order to combat inflation.

This is especially the case when crude prices rise sharply, at which time large refiners suffer heavy losses, and report declines in overall profits.

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