CAO banking on China jet-fuel demand to take it to greater heights

The strong growth in air passenger traffic in China shows the robustness of the jet-fuel industry, says CAO chief executive Meng Fanqiu.
The strong growth in air passenger traffic in China shows the robustness of the jet-fuel industry, says CAO chief executive Meng Fanqiu.ST PHOTO: YEO KAI WEN

The annual double-digit growth in demand for jet fuel in China will continue to be a key growth driver for China Aviation Oil (CAO) in the next five years, said chief executive Meng Fanqiu.

"While there're a lot of uncertainties and instability in the global economy, especially with China's slowdown over the past two years, we're lucky to have chosen a relatively better industry," said Mr Meng in Mandarin.

He pointed to the strong growth in air passenger traffic numbers in China to illustrate the robustness of the industry.

The total air traffic turnover (measured in tonne-kilometres) grew 14.5 per cent in the first half of the year, surpassing the 11.4 per cent expansion in 2014.

Passenger flights surged 12.5 per cent, while cargo flights increased by 6.6 per cent.

"Demand for jet fuel in China is expected to grow at 10 per cent annually up to 2020; CAO will grow in tandem with the industry," he said.

Mr Meng said CAO, the sole importer of jet fuel in China, has been relatively unaffected by the impact of low oil prices and the Chinese yuan's devaluation. "We operate on a cost-plus model where we earn a commission over the prevailing oil prices when we supply to our clients," he said.

But he also conceded that oil-price volatility has curtailed trading activities in other oil products such as petrochemicals.

"Counterparty risks have increased and some of our trading partners went out of business, so naturally the volumes went down as well," he said.

He also does not foresee any substantial impact from the yuan devaluation as all of CAO's businesses are transacted in US dollars.

"The only impact is on our share of profits from the Shanghai Pudong International Airport Aviation Fuel Supply Company. The profits are denominated in renminbi (Chinese yuan)," he said.

CAO owns a 33 per cent stake in the fuel supply firm, which contributed 71.3 per cent of CAO's net profit in the most recent quarter.

A spokesman later said that CAO's exposure to the yuan devaluation is estimated at "a little less than US$1 million (S$1.4 million)" for the full year. Last year, CAO's net profit was US$49.2 million.

CAO has set its sights on becoming a global leader in physical jet fuel trading over the next five years, said Mr Meng. He also hopes CAO can become a force in the petrochemicals and fuel-oil markets.

Other than expanding its presence in international airports outside of the 35 it serves in China now, he intends to participate in the clean-energy space, such as biojet fuel and liquefied natural gas, so as to "keep pace with the changing needs of the world".

Having established itself in the Asia-Pacific market, Mr Meng said North America and Europe will be his next area of focus.

"We are also interested in the Middle East and Australia. But they can come next," he said.

Mr Meng is fully aware that he needs to invest more to ensure a strong and sustainable growth trajectory. "We could invest in three areas - front-end production to secure supply, storage and pipelines to optimise the logistics supply chain and refuelling facilities in airports to increase demand," he said.

As he is confident that there is abundant supply, he plans to focus on investments in the logistics supply chain and refuelling facilities.

He pointed out that its recently operational Hong Kong subsidiary, which provides refuelling services for aircraft at the local airport, is its first outside of China and a key step in its international expansion.

"I'm always on the lookout for acquisition opportunities."

A version of this article appeared in the print edition of The Straits Times on September 28, 2015, with the headline 'CAO banking on China jet-fuel demand to take it to greater heights'. Print Edition | Subscribe