Air China Ltd., the country's flagship carrier, said its first-half net profit dropped by 12.5%, hurt by foreign exchange losses that outweighed lower fuel costs and cost control measures.

Net profit for the six months to June 30 was RMB 3.46 billion, down from RMB 3.95 billion in the same period a year earlier.

Large-scale borrowing in U.S. dollars to buy planes has exposed the airlines to foreign exchange losses after the yuan fell 2.3% against the dollar in the first six months to become Asia's worst currency performer.

Air China said it booked currency losses of RMB 1.7 billion over the period, sharply higher than a loss of RMB 123 million over the same period a year ago.

The company's yield, the average fare paid by a passenger per km, fell 4.34% to RMB 0.53 as it increased capacity.

Air China said it expects rosy demand for outbound travel from the country to continue, but that competition among airlines for passengers was intensifying and that currency fluctuation risks remained.

Air China's Hong Kong-traded shares closed down 2.75% on Tuesday ahead of its half-year earnings, underperforming the Hang Seng Index .HSI which closed 0.85 percent higher.

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