By Edwin Chan SHANGHAI, March 21 (Reuters) - China's Hainan Airlines said on Thursday it plans to list in New York to raise capital and reported a sharp and unexpected 39 percent drop in 2001 earnings due to fewer exceptional gains and soaring borrowing costs. The small regional carrier, which has been expanding aggressively to compete with giant rivals, said in a statement net profit last year was 100.30 million yuan ($12.1 million) under domestic accounting standards, down 39 percent from 2000. Hainan Air (900945)(600221) said it planned to add 21 planes this year, including six Boeing (BA) 737-800s, three Boeing 767s and 12 Dornier 328s, and list American Depositary Receipts (ADRs) in New York. "We plan to issue ADRs to enter global capital markets, boost the firm's presence on international markets and form a fund-raising base for development," said the statement in the Shanghai Securities News. It gave no further details. Analysts said they had expected the small regional carrier, 14.8-percent owned by the American Aviation LDC investment fund which is partly controlled by global financier George Soros, to report a rise in net profit due to booming domestic travel. They were surprised at the 80 percent surge in borrowing costs, largely fuelled by rapid expansion as it acquired other regional carriers and bought planes amid an aviation sector overhaul. China's aviation regulator has ordered 10 airlines under its direct control to merge into three giant groups. Smaller carriers like Hainan Air were left out in the cold, and have been busy forming their own alliances to compete with the big three. Hainan Airlines acquired small Shaanxi-based Changan Airlines and Beijing-based Xinhua Airlines last year. It is also taking a controlling stake in Shanxi Airlines. HIGH-FLYING COSTS Capital International's airline analyst Xu Jie said a surge in operating costs due to rampant fare discounting and heavy borrowing costs undermined Hainan Air's profits last year. "Their bottom line was hit because they bought three carriers, Changan, Xinhua, and Shanxi, sparking a huge leap in borrowing costs to 450 million yuan," Xu said. "Fare discounting has also become a very widespread practice, whereby airlines take losses on some tickets. You can see that Hainan Air's operating costs nearly doubled, largely because of this." According to Multex Global Estimates, the consensus of two analyst forecasts was 175.9 million yuan under international accounting standards. But under international standards, which showed 2000 profits of 145.60 million yuan, earnings came to a mere 57.29 million yuan, Hainan Air said. It said the difference between domestic and international accounting standards was largely in deferred expenses and provisioning for construction projects. Hainan Air officials were not available for comment. "Exceptional gains, including returns on the sale of investment and non-operating revenues, were 43.50 million yuan lower than 2000 and financing costs rose last year," the statement said. The airline, based on the southern tropical island province of Hainan, is regarded as one of China's best regional carriers with an aggressive expansion strategy. Hainan Air said in Feburary it planned to form a new Cambodian flag carrier with the Phnom Penh government, a move analysts saw as aimed at the potentially lucrative Mekong Basin regional market. It reported turnover of 3.25 billion yuan last year, up a hefty 41.3 percent partly due to its acquisitions during the period of Changan Airlines and Xinhua Airlines. Their balance sheets have been consolidated. Hainan Air aimed to boost turnover by 75 to 80 percent in 2002 and cap a rise in costs at 60 percent, the statement said. ©2002 Reuters Limited.