Air China, preparing for an initial public offering next month, plans to spend 18.7 billion yuan (HK$17.57 billion) buying aircraft and building an airport terminal, according to research by one of the sale's arrangers.

The Beijing-based company, China's largest international carrier, plans to buy 46 aircraft by 2006, boost existing services and construct a new terminal at Beijing airport, according to Merrill Lynch.

Air China may raise at least US$750 million (HK$5.85 billion) from the IPO to expand and repay debt, people familiar with the plan said in October.

Chinese airlines have been expanding their fleets as residents of the mainland grow richer and travel more. Air China, which will have 150 aircraft by the end of this year, needs to expand its fleet to maintain its market share.

``We expect Air China's operating cashflow to be re-invested in fleet growth over the next three years,'' Merrill said. ``Air China has a relatively young fleet.''

Passenger traffic in China, the world's fastest-growing market, is expected to grow 8.1 per cent in each of the next 20 years, after rising 14 per cent in the past two decades, according to estimates by Boeing.

Next year, Air China and competitors such as China Southern Airlines and China Eastern Airlines may add more flights and the number of seats available is expected to outstrip passengers, the research said. That may crimp profit.

Air China's profit growth may slow to 2.2 per cent next year and 2.3 per cent in 2006, the research said. The Beijing-based company may earn 2.29 billion yuan of net income this year, 14 times the 160 million yuan it earned before its assets were reorganised, Merrill said.

Air China had 34.4 billion yuan of debt at December 31, or 81 per cent relative to its capital, according to Merrill's research. China Southern's total debt as a percentage of its capital was 58.2 per cent at the end of 2003, and China Eastern's ratio was 77.45 per cent, according to Bloomberg data.

Merrill and China International Capital are arranging the sale. Merrill's Mark Tsang declined to comment.

Air China has 51 per cent of the nation's international passenger market and a 35 per cent share of the domestic market, Merrill research said.

The airlines passenger aircraft had an average age of 7.6 years at June 2004, the research shows.

Air China plans to sell as many as 2.81 billion shares, according to a sale document sent to investors last Friday. The company expects to price its shares in the week of December 6 and start trading on December 16.

BLOOMBERG