Cathay shares fall sharply on fuel hedging loss

Shares in Cathay Pacific Airways Ltd. fell sharply Thursday after Asia's third-largest carrier said it could lose nearly $1 billion from hedging its jet fuel costs, adding to the toll on global airlines from bad bets on oil prices.

The company also reiterated its profit warning for 2008, saying passenger and cargo traffic had weakened significantly in November and December. Cathay shares tumbled 7.6 percent to 8.97 Hong Kong dollars on the territory's stock exchange.

Hong Kong's flagship airline, in a statement late Wednesday, said its unrealized losses from hedging contracts as of year's end had soared to HK$7.6 billion ($980 million) as oil prices slumped in recent months. That's almost triple the HK$2.8 billion ($361 million) hedging loss the carrier had reported as of Oct. 31.

The bets were originally placed to protect against surging oil prices early last year. Most of the losses on the contracts, which run through 2011, hadn't been realized and could be lower should fuel prices rise again, the carrier said.

Airlines around the world have wracked up huge losses after trying to limit their fuel costs when oil prices spiked last year, incorrectly betting that prices would continue to rise.

Air China, the mainland's No. 2 carrier, in November reported potential hedging losses of 3.1 billion yuan ($454 million). That same month, United Airlines said it would have to put up some $990 million in collateral on fuel hedges that had turned against the company.

About half of all fuel used by the global airline industry was hedged in 2008, according to the International Air Transport Association.

"What Cathay has done is taken some risk and it's backfired," said Damien Horth, Asia transport analyst at UBS AG in Hong Kong, who says the airline's strong network and management still leave it well positioned to weather the downturn.

"I am skeptical on the economic benefit of hedging for airlines," he said.

With oil prices sharply lower, Cathay said it expected this year's fuel bill to be about HK$20.3 billion less than 2008's.

The airline again advised that full-year earnings would be disappointing, its second warning since November. Bookings for the first quarter of 2009 also are "markedly down" from last year, the company said.

"I think the biggest challenge is the weak state of the market - both the passenger market and the freight market. We see significant weakness in those markets going forward," Cathay CEO Tony Tyler told reporters in Hong Kong.

The company posted a HK$663 million loss in the first six months of last year amid mounting jet fuel costs - the first half-year loss in nearly five years.

To cope with the downturn, Cathay plans to park two freighters, offer unpaid leave to employees and possibly delay construction on a cargo terminal to cut costs.

It will keep passenger growth flat in 2009 by scaling back services to North America and adding flights to Australia, the Middle East and Europe, but the airline won't cut any destinations.