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China Eastern to stem fuel hedging losses

(China Daily)
Updated: 2009-02-19 07:53

The new management of China Eastern, the nation's third largest airline, is taking steps to stem mounting losses from its wrong bets on fuel hedging contracts.

Related readings:  China Eastern expects profit in 3 years  China Eastern gets $1.46b credit line  China Eastern gets $820m loan from group

After a slew of other cost cutting measures recently, the company is reportedly trying to reduce its positions in what is commonly known as fair-value hedging transactions.

It had already incurred book losses of more than 6 billion yuan as of end December through these transactions.

China Eastern is known to have hedged 36 percent of its jet-fuel needs at strike prices that would increase the losses, at least on paper, after the price of oil falls below $35 per barrel.

China Eastern, of course, was not the only airline company to have taken a hit from trading in derivatives. Both Air China and Hong Kong's Cathay Pacific have reported big losses in fuel hedging. But China Eastern, being the smaller of the three, was hurt the most.

China Eastern is expected to report a loss of 11 billion yuan in 2008 and get a "special treatment" status on the Shanghai bourse due to its negative assets.

The company was bailed out in December by a 7 billion yuan government cash injection and a 35 billion yuan credit line from the Agricultural Bank of China, Shanghai Pudong Development Bank and Bank of Communications.

Under the newly installed chairman Liu Shaoyong, the company has drawn up 256 cost-cutting measures. It aims to pare spending by 3 billion yuan this year, Liu said.

The carrier is axing plane deliveries, planning asset sales and cutting management pay as it strives to break even next year.

The airline is targeting a "significantly" smaller loss this year.

China Eastern shares closed unchanged at HK$1.08 in Hong Kong. The stock gained 0.6 percent to 5.41 yuan in Shanghai.