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China Eastern books huge fuel-hedging loss

By Wang Ying (China Daily)
Updated: 2009-01-13 07:43

China's third largest carrier China Eastern Airlines on Monday reported a paper loss of 6.2 billion yuan on fuel-hedging contracts throughout last year.

China Eastern Airlines' actual fuel-hedging loss ballooned from $420,000 to $14.15 million from last November to December, up 3,269 percent month-on-month.

The huge loss comes directly from the sharp fall of crude oil futures prices over the past six months. Crude oil delivery for February dropped as much as 72.45 percent ending at $40.5 a barrel traded in New York, from an all-time high of $147.27.

The 6.2 billion yuan loss is even larger than the market speculation of 4 billion yuan, and will affect China Eastern's share price and this year's performance because the market has already prepared to face the loss, said Li Lei, an analyst with CITIC China Securities.

Related readings:  China Eastern reports huge loss in fuel hedging  China Eastern to cut managerial staff salaries by 10 to 30%  China Eastern tries to ride out  Ailing China Eastern goes on cost cutting binge

According to China Eastern's board secretary Luo Zhuping, the carrier started to use fuel-hedging contracts to stabilize jet fuel costs in 2003. Most of the contracts are as long as two to three years.

Since the third quarter last year, the aviation industry has felt the global recession as harshly as any sector.

Fuel-hedging contracts did protect Chinese airlines from sudden fuel cost surges previously, but the slump of the crude oil price in the past few months caught China Eastern off guard. China Southern Airlines made a $5 million profit since it wisely ceased fuel-hedging investment last year, said Yao Jun, an analyst at China Merchants Securities..

Although Air China hasn't announced its loss in fuel-hedging contracts yet, Li Lei estimated it will exceed the 3.1 billion yuan.

If the loss of 6.2 billion yuan is added into China Eastern Airlines' balance sheet, the carrier is expected to report an 8.3 billion yuan loss for 2008, a further blow to a company having a debt-to-equity ratio of nearly 99 percent, said Yao.

"The loss of the airliner will not be able to be exactly estimated, as long as the airliner doesn't reveal the contract details," said Li. According to Luo, the company has 20 million barrels of fuel-hedging contracts at the moment.

A possible move for the ailing carrier in getting through the hardship would be to merge with Air China or its local competitor Shanghai Airlines, said Yao, who said such a change could happen this year.