Flag carrier Air China saw its net profit in January-June fall 21 percent, sapped by surging fuel costs and waning passenger demand.

The Beijing-based airline's 1.24 billion yuan (US$181.3 million) for first six months of the year compared with net earnings of 1.57 billion yuan in the first half of 2007.

Fuel costs rose to 10.6 billion yuan (US$1.5 billion) in January-June, up 32 percent from 8 billion yuan in the same period a year earlier, the airline reported early Wednesday.

The Chinese airline sector has seen growth in passenger demand ease following the catastrophic May 12 earthquake in central China and in the run-up to the Beijing Olympics.

"In the first half of 2008, due to the global economic downturn, increased inflationary pressure, soaring fuel prices and damaging natural disasters such as earthquakes, the global aviation industry, in particular, the Chinese aviation industry, experienced an unprecedented challenge," the airline said in a statement to the Hong Kong Stock Exchange.

At the same time, the Chinese yuan's appreciation against the U.S. dollar yielded a 1.9 billion yuan (US$278 million) foreign exchange gain, up from a gain of 867 million yuan in the first half of 2007, Air China said.