BEIJING (BLOOMBERG, REUTERS) - China's aviation regulator will cut Air China's Boeing 737 flights by 10 per cent and cancel licences of the pilot and co-pilot involved in a July 10 incident when a pilot, while smoking an electronic cigarette in the cockpit, caused the plane to go into a free-fall.

Analysts say the move could push the airline to cut some routes.

The co-pilot of a Boeing Co. 737 aircraft, flying from Hong Kong to Dalian, tried to turn off a circulation fan to prevent smoke from reaching the cabin, but ended up switching off the air-conditioner instead, according to an initial probe by the aviation safety regulator.

That triggered a depressurisation alert and resulted in rapid loss of altitude. Oxygen masks dropped as the plane plunged, but it eventually landed safely.

As part of the penalties, the Civil Aviation Administration of China (CAAC) ordered the state-owned flag carrier to cut its Boeing narrow-body jet flight capacity by 10 per cent, government television CCTV reported on its WeChat account Wednesday (July 18). That would amount to a reduction of 5,400 flight hours a month.

CAAC also imposed a fine of 50,000 yuan (S$10,188) on the carrier and scrapped the licences of the pilots involved, the channel said.The regulator didn't specify how long the capacity cut will be in force.

The airline and the CAAC did not respond to Reuters'requests for comment on Wednesday. Air China shares fell as much as 1.4 per cent in Hong Kong in response to the safety crackdown, before recovering slightly, against a flat Hang Seng index.

The stock is down nearly 40 per cent in Shanghai so far this year, amid a falling yuan and higher oil prices.

The measures by the regulator are likely to hurt the Beijing-based company, which is already bracing for higher expenses from a weakening yuan and rising fuel costs.

The penalty could result in about a 3 percentage point drop in Air China's capacity, according to an estimate by Tianfeng Securities Co.

BOCOM International analyst Geoffrey Cheng said the crackdown would likely have an impact on Air China's flight schedules, especially as it enters peak travel season, but could also prompt the airline to cut poorly performing routes.

"It could have pros and cons," he said.

A Chinese aviation professor, who spoke on condition of anonymity as he was not permitted to speak to media, said the cuts appeared to only apply to Boeing 737 planes stationed at Air China's Beijing headquarters.

"For a big company like Air China they can move some 737s to their companies in southwest China or Zhejiang ... which could lessen Air China's losses," he said.

Air China has several branch offices in places such as Inner Mongolia and Shanghai as well as number of subsidiary airlines. It operated 269 Boeing 737s out of its 655-strong fleet at the end of December, according to its full-year report issued in March. It has 311 Airbus 320 and 321 jets.

CAAC PUNISHMENTS

Chinese airlines have a good safety record in general, but passengers have, on occasion, accused pilots of smoking during flights. Few such incidents have been confirmed, however.

In the incident involving Air China's Boeing 737, the plane was flying to the Chinese city of Dalian from Hong Kong on July 10 when it dropped to 10,000 feet (3,048 m), with oxygen masks deployed, before climbing again.

Preliminary investigation by the regulator showed the co-pilot was smoking an e-cigarette and as smoke diffused into the passenger cabin, relevant air conditioning components were wrongly shut off, resulting in insufficient oxygen.

The CAAC often punishes airlines or aviation staff if it finds them guilty of violations. Last year, CAAC fined Gulf airline Emirates 29,000 yuan for two safety violations in Chinese airspace and barred it from expanding its operations in China for six months.

In 2015, the regulator ordered Beijing-based Okay Airways to cut its flights by 20 per cent and fined it 500,000 yuan for overworking its pilots.