Cathay Pacific Airways, Hong Kong's largest airline, said its financial results for 2008 are expected to be disappointing due to the losses on fuel hedging contracts.

The airline warned that its fuel hedging losses stood at about HK$2.8 billion as of Oct 31. The losses, however, are mainly due to the fall in fuel prices.

The losses were estimated on a marked-to-market basis. "It is important to note that these are not cash losses," Cathay Pacific stressed in its statement to the stock exchange last night. The marked-to-market losses at the end of September stood at HK$630 million.

The purpose of entering into fuel hedging contracts is to give a degree of certainty to the fuel price and protection against price hike, but losses were incurred as the fuel price dropped substantially in recent months.

The spot price for jet fuel was at its peak in July this year. It reached $181.8 per barrel, since then the spot price has fallen to $76.7 per barrel, according to the statement.

The average price paid by Cathay Pacific for fuel in the first half was 60 percent above that was paid in the same period last year. The airline booked a first-half loss of HK$663 million on the increasing fuel costs.

The airline said in the statement that the lowered fuel cost provides "welcome relief". However, two other factors - the hedging losses and the weakness in revenue - caused the airline to issue another profit warning after its warning on first half result was issued in July.

Revenue has started to weaken materially, the statement said. This reflects in particular a significant strengthening of the US dollar and reduced first and business class travel and cargo volumes in the current adverse financial and economic circumstances.

"Adverse currency movements are expected to reduce passenger revenues in Hong Kong dollar terms for the remainder of 2008," according to the statement.

There is a sign that the operation environment is getting worse. Cathay Pacific said the first and business class advance booking are showing year-on-year declines, while available capacity has increased.

There are concerns over corporate travel volumes in all classes as corporate clients begin to impose stricter travel policies. The airline also added that demand for economy class seats has also nosedived.

(HK Edition 11/06/2008 page2)