SHARES in airlines, once the darling of the market, have plunged dramatically after the Sichuan earthquake and in the run-up to the Olympic Games.

Mutual funds sold 12.7 billion yuan (US$1.85 billion) worth of airlines shares in the first quarter of this year and dumped another 7.3 billion yuan of shares in the second quarter. Shares in China Southern Airlines accounted for about 40 percent and Air China accounted for 48 percent.

Three major airlines on the Chinese mainland have all been hit by the sluggish stock market.

Air China, the country's flagship international carrier, has fallen about 80 percent to 5.63 yuan, while China Southern Airlines, the country's largest carrier by fleet size, also lost 80 percent to 5.17 yuan. China Eastern Airlines has tumbled 77 percent to 4.90 yuan.

Their slump even exceeded the 55-percent decline of the benchmark Shanghai Composite Index this year.

"A weak economy, tightened visa regulations during the Olympic Games and the devastating earthquake in Sichuan Province all dampened demand for air travel, more than we expected," said Ma Xiaoli, an analyst with CITIC Securities Co.

In May, an 8.0-magnitude earthquake killed almost 70,000 people. The disaster also struck the country's aviation market, which handled 14.17 million passengers in June, a drop of 3.8 percent from a year earlier.

Meanwhile, the country began tightening visa regulations and beefed up security checks ahead of the Beijing Olympics to ensure a trouble-free event, which gave another shock to the carrier.

Air China handled 2.98 million passengers last month, dropping 6.8 percent from a year earlier, with the load factor decreasing 8.1 percent to 73.3 percent. China Southern's passenger volume dropped 2.3 percent and the load factor slid 1.4 percent to 75.1 percent.

"The third quarter will still be an off-season for the aviation industry, but we expect that the market will recover in the fourth quarter and grow faster next year since some negative effects were one-off," Ma said.

Although China Southern boosted first-half profit fivefold to 847 million yuan, analysts were still pessimistic about its third-quarter performance as the earnings were backed by a strong yuan and government subsidy.

Its passenger volume, which accounted for 90 percent of its whole business, rose 5.7 percent in the six months, lagging behind its 16.6-percent growth a year earlier.

"Climbing crude prices, the Sichuan earthquake and tightened security checks for the Olympic Games led to the weak performance of airlines," said Han Weiqi, an analyst with Capital Securities Co.

Exchange gains and government subsidies have helped Chinese airlines suffer less from rising fuel prices than overseas rivals.

China Southern lowered the value of its dollar-denominated debts after the yuan gained 6.6 percent in the first half. Hainan Airlines also estimated that its first-half profit probably rose more than 50 percent in the first half.

"China Southern's exchange gains and government subsidy exceeded 3 billion yuan in the first half, which were major boosts for its income, but with the slowed appreciation of the yuan and increasing domestic jet fuel prices, it is very likely to suffer a slide in the third quarter," Han said.

The Guangzhou-based carrier has announced savings of 1.3 billion yuan this year by trimming costs and infrastructure investments. That included cutting the pay of Chairman Liu Shaoyong and other executives by 10 percent from July.

Government subsidies also help offset higher fuel costs.

Shanghai Airlines flew into the black in the first half of this year on rising traffic and a government subsidy.

The carrier's net income reached 23.41 million yuan, or 0.022 yuan a share, in the six months compared with a loss of 134.51 million yuan a year earlier. However, a government subsidy contributed 42 million yuan to its income.

President Fan Hongxi told Shanghai Daily that soaring fuel costs may prevent Shanghai Airlines from gaining its target of 200 million yuan this year. "Jet fuel prices have surged to 8,200 yuan a ton, compared with 3,000 yuan in 2005, and raised costs by an extra 400 million yuan, so it's hard," Fan said.