China's biggest domestic airline, China Southern, has posted a 39% drop in profits after fluctuations in the Japanese yen played havoc with its debt repayment costs.

But both passenger numbers and sales revenues at China Southern rose during the first six months of this year.

And, in a further sign of optimism over the regional aviation market, a carrier based in the tiny province of Hainan Island has reportedly received credit facilities worth nearly $500m.

Hainan Air is part-owned by billionaire financier George Soros's investment fund, American Aviation, which has a 15% stake.

Independent goes for growth

Hainan Air has arranged bank credits worth $491m to help pay for new planes, the Beijing based Economic Daily newspaper said.

Boeing has big orders from China

The carrier is expanding across southern China and flies international routes in South East Asia.

China's airline market has seen rapid growth in passenger numbers and new airports as every large city builds new facilities or modernises old ones.

Passenger numbers have reached about 100 million a year, according to analysts.

Reshaping the market

But the Chinese government is pushing through a cull of the carriers, to regroup some 20 airlines into three regional alliances.

China Southern is at the heart of this strategy, since it has been picked as the main player in the biggest alliance.

It posted net profit of 123.23m yuan ($14.9m; �9.8m) for the six months to 30 June, compared with 201.5m yuan for the same period last year.

China Southern's sales rose 6% to 8.6bn yuan, compared with 8.07bn yuan, while passenger loads were up nearly 4%.

Currency troubles

About 10% of China Southern's debts are in Japanese yen and the cost of repayments has risen as the yen unexpectedly strengthened earlier this year, analysts said.

Crashes of China Northern and Air China planes raised safety worries

The yen had been falling for months, but as panic about US corporate corruption took hold in the spring, it surged against the dollar.

Analysts expect China's number two domestic carrier, China Eastern, to report similar problems when it issues financial results on 26 August.

They have forecast a 55% slide in China Eastern's profits.

Meanwhile, ticket prices wars took their toll on earnings at the smallest of China's four listed airlines: China Shandong said profits fell 66% in the first half of this year to 11.8m yuan.

Higher debt servicing costs and a squeeze on revenues could eventually create problems for Chinese airlines' ambitious plans to modernise their fleets.

China Southern, for instance, has ordered 20 Boeing 737-800 planes, costing $1.6bn over the next three years.

Safety fears

Two fatal crashes earlier this year raised questions about whether China's airline reform was too fast or not fast enough.

Meanwhile, Hong Kong's international carrier, Cathay Pacific, has reportedly applied for licences to fly three of China's most profitable routes - from Hong Kong to Beijing, Shanghai, and the southern city of Xiamen.

A company source said that the airline was waiting to learn if the Hong Kong authorities would back an approach to mainland officials, Reuters news agency reported.