China's airline industry is expected to continue the recovery that started last year amid rising demand for seats and cargo space, and expectations of an appreciating yuan, analysts said.

But they see headwinds on the horizon as air travel faces increasing competition from new bullet train services across China.

Domestic carriers handled a combined 230.5 million passengers in 2009, up 19.7 percent from a year earlier, the Civil Aviation Administration of China said. Cargo handling rose 9.3 percent to 4.45 million tons.

The 2009 performance was a big improvement from 2008, when passenger volume edged up only 3.3 percent and cargo growth was almost flat with a 0.3 percent gain.

"Air demand is expected to grow 13 percent to 15 percent this year, with airlines expected to add between 10 percent and 12 percent capacity," said Tao Wei, an airline analyst at China International Capital Co Ltd. "That will improve load factors and ticket prices for domestic carriers.

"In addition to that," she added, "as a recovery in exports increases the possibility of an appreciation of the yuan in March and April, the performance of airlines will be further boosted by exchange gains."

The appreciation of the yuan will cut the repatriated value of US dollar-denominated debts for the airlines. For every 1 percent rise in the value of the yuan, earnings per share increase 0.04 yuan (0.59 US cent) at China Southern Airlines, 0.3 yuan at China Eastern Airlines and 0.02 yuan at Air China, according to Tao.