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Fuel-hedging losses hit China Eastern

By Zhou Yan (China Daily)
Updated: 2008-11-27 13:38

China Eastern Airlines is evaluating potential losses from its fuel-hedging contracts, said the company yesterday, declining to verify reports that the cost may be as much as $690 million by Nov 14.

"We're assessing the possible losses on fuel-hedging operations, but not able to comment until accurate figures are released," said Luo Zhuping, board secretary of the Shanghai-based carrier,who refuted previous reports that the company was asked to suspend its hedging contracts by the central government.

China Eastern "incurred fuel hedging losses totaling $690 million as of Nov 14", the Dow Jones Newswires said on Tuesday, citing a person familiar with the situation.

The source said the Shanghai-based carrier typically hedges 36 percent of its jet fuel.

"It's no surprise the carrier suffered losses from fuel hedging in light of the sharp decline of international crude oil prices, but the figure may not be that large, " said Huang Jinxiang, an analyst at Guodu Securities.

The January crude oil futures contract closed at $ 50.77 a barrel on the New York Mercantile Exchange on Nov 25, compared with an all-time high of $147.27 a barrel on July 11.

Chinese airlines are only allowed to purchase fuel at international prices for overseas routes, for which they often enter fuel-hedging contracts to lock in their oil costs, noted Huang.

The amount of jet fuel China Eastern uses for international flights is about 75 percent of what its competitor Air China uses.

Air China said last Friday that it faces climbing potential fuel hedging losses of 3.1 billion yuan as of Oct 31, up from 2.1 billion yuan a month earlier because of rising oil price.

China Eastern may realize the reported losses if its contracts were not for hedging fuel costs but for speculations, said Yao Jun, an analyst at China Merchants Securities.

The carrier lost 270 million yuan on fuel hedging contracts in the third quarter. But Huang said the exact figures are hard to estimate if the company doesn't reveal contract details.

China Eastern posted a net loss of 2.33 billion yuan from July to September, compared to a net profit of 976 million yuan over the same period last year.

"The fuel hedging losses will make the company's annual report look even worse," Yao said, adding the carrier's debt-to-equity ratio has already exceeded 95 percent in recent years' operations.

A-shares of China Eastern remained flat to close at 3.93 yuan yesterday.