Source: China Daily Author: Wang Ying 01/21/2009
Subject Concerned: Opinion Airlines Aviation Fuel
Air China, the nation's largest international carrier, said its paper loss from fuel-hedging contracts in 2008 have swollen to 6.8 billion yuan due to the falling global oil prices.
Air China's actual fuel-hedging loss in December alone was US$52.8 million. Earlier the carrier reported a loss of 3.1 billion yuan by the end of October.
The airline started to use fuel-hedging contracts as a shield from the impact of possible soaring fuel prices since 2001.
However, as the oil price kept mounting in the first half of 2008, Air China built up a heavy reliance on fuel hedging contracts. "Currently, fuel hedging contracts account for 50 percent of our total jet fuel consumption," said Rao Xinyu, board secretary, Air China.
In 2007, Air China used 2 million tons of jet fuel, and the figure for 2008 is still under calculation, Rao said. This could also be the first time that Air China is facing losses after it was listed on Hong Kong and London bourses in 2004, she added.
According to the company's announcement, the contracts leading to the huge loss were signed in July last year, and the latest one is due by 2011, said Yu Jianjun, analyst, Huatai Securities.
Yu stressed that financial institutions and experts were also to blame for the astronomical losses as "they predicted in July that oil prices would stay above the US$100 per barrel mark for some time. Goldman Sachs had even alerted that crude prices could touch a high of US$200 per barrel soon."
The eagerness to lock future risks coupled with investment suggestions from institutions drove Chinese carriers to strike fuel-hedging deals involving large sums, added Yu.
Yao Jun, analyst, China Merchants Securities, said although the paper losses in such contracts could reach a high of 6.2 billion yuan for China Eastern, they did not feel the squeeze till now. "As long as the contracts are not ended, the airlines will possibly lose less if the jet fuel price rises later," said Yao.
According to Mao Ang, analyst, China Galaxy Securities, the hedging losses would wreak further havoc on the already cash-strapped airlines. In 2008, due to unusual natural disasters, stringent security checks during the Olympic Games, and the ongoing global financial crisis, the domestic aviation industry experienced a sharp fall in passengers.