Chinese airline stocks outperformed the Shanghai stock market on Oct. 6 thanks to the favorable news of jet fuel price cut in Q4.

On Oct. 6, the A-stock of China Southern Airlines kept unchanged at 3.69 yuan, that of Air China dropped 3. 12 percent to 5.90 yuan, while that of China Eastern Airlines gained 1.40 yuan to close at 4.36 yuan, compared with a sharp fall of 5.23 percent for the benchmark Shanghai composite index.

In spite of the good performance on Oct. 6, analysts believe there have been no significant changes to the fundamentals of the Chinese aviation industry.

It was officially announced during the week-long holiday last week that in the forth quarter, jet fuel price on the Chinese mainland would be lowered to 7,750 yuan (US$1,138) per ton, nearly 6.9 percent or 570 yuan (US$83.7) less than in the third quarter.

As of 2007, China's domestic jet fuel has been usually adjusted quarterly in accordance with the price fluctuation of international jet fuel.

Zhang Wei, an industry insider with the Chinese Ctrip.com website, said the cut resulted from a price drop on the international crude oil market.

"Investors are worried that demand for crude oil is becoming weak, which brings down the oil price. To the aviation industry, domestically and globally, lower oil price might mean a turning point, " Zhang said.

Fuel cost accounts the biggest part, about 50 percent, of the operating cost among Chinese airlines.

The Chinese aviation industry was faced with huge pressure on rising jet fuel price. Since this year, the country's jet fuel price was raised three times -- by 210 yuan per ton in January, 1,500 yuan in June and 720 yuan in July. In the second quarter, China cut domestic jet fuel price by 80 yuan per ton.

On Jul. 8 when China Aviation Oil, the country's quasi-monopolistic jet fuel supplier, raised the fuel price by 720 yuan per ton, Chinese airlines had to buy fuel at a price 39 percent more than the price at the end of 2007, which stood at 5,970 yuan per ton.

Despite soaring fuel costs, the three major Chinese airlines -- Air China, China Eastern Airlines and China Southern Airlines -- achieved profit in the first half thanks to huge exchange-rate gains, according to their half-year reports.

Aggregate exchange-rate earnings exceeded 6.4 billion yuan in the first half. These gains were about triple the first-half net profits of the three, which totaled 2.16 billion yuan.

Analysts attributed the currency gains to the appreciation of the yuan, or Renminbi, in the first half. From January to June, the yuan appreciated 6.5 percent against the U.S. dollar, nearly equivalent to last year's total appreciation.

The three airlines had massive dollar-denominated liabilities, but as the yuan strengthened, it cost them less to settle these liabilities, such as aircraft purchases and leases. This was conducive to paring costs.