Trade in Air China (SH 601111) shares, the national flag carrier, started Friday morning on the Shanghai Stock Exchange, with the opening price marginally lower than the issuance price.

Air China saw its share price open at 2.78 yuan (US$0.35) on the mainland bourse's first trading day, 0.02 yuan lower than its issuance price.

The airline issued 1.639 billion A-shares at a price of 2.80 yuan in its initial public offering (IPO) on the domestic stock market.

It has raised around 4.5 billion yuan from the share sale, substantially less than the eight billion yuan the carrier had initially hoped to raise.

The proceeds from the share sale will be used to purchase new aircraft, including 20 Airbus 330-200s, 15 Boeing 787s, and 10 Boeing 737-800s, the company has said.

The money will also be spent expanding its operations at Beijing Capital International Airport, its home base.

Chinese investors expect newly listed stocks to do well and provide quick profits.

CAMC Engineering, the first Chinese firm to launch an IPO in June following the lifting of a year-long ban on new shares offerings, was 576 times oversubscribed and saw its price rocket as high as 50 yuan on the first trading day due to excessive speculation. Its issuance price was a paltry 7.4 yuan.

Air China is the first company to see its opening price dip under its issuance price since the country resumed IPOs.

Air China's embarrassing public offering is a reflection of investors' jitters over the market's ability to absorb a raft of new floats, as well as their concerns about airline company performances against a backdrop of consistently high oil prices, analysts say.

Since regulators reinstated share sales in mid-June after the year-long freeze, about six billion dollars in stock has hit the market, sparking investor concerns that capital flows could dry up and send the market tumbling.

"I think Air China's move will be push the country's securities regulator to rebalance supply and demand for new share offerings in the coming months," said Zhou Lin, an analyst at Huatai Securities Company.

"The key problem is maintaining sufficient capital inflows," said Zhang Qi, an analyst at Haitong Securities Company.

"Investors are not optimistic about airlines," said Zhang. "If institutional investors think profits will be lower than bank yields, then they won't purchase."

The constant rise in jet fuel prices in recent years has increased Air China's operational costs. If fuel prices keep increasing and ticket prices cannot go up at the same rate, the company's overall performances will be greatly affected, it said in the IPO document.

Meanwhile, the country's jet fuel surcharge policy has had a big impact on Air China's business. The resumption of jet fuel surcharge collection in October 2005 provided Air China with a windfall fuel surcharge income of 1.663 billion yuan in 2005, 1.141 billion more than in 2004.

Oil price fluctuations led the Chinese government to raise fuel surcharges this year from 20 yuan to 30 yuan for domestic air trips of less than 800 kilometers and from 40 to 60 yuan for trips over 800 kilometers.

The price adjustment covers the period April 10 to October 10, 2006. The government's decision to terminate or extend the surcharge period will have a very big impact on Air China's profitability.

(Xinhua News Agency August 18, 2006)