Air China reports $454m of fuel hedging loss by October
Updated: 2008-11-22 15:59

Air China, the country's largest international carrier, said its loss in the fair value of fuel hedging contracts jumped to 3.1 billion yuan ($454 million) by the end of October.

The Beijing-based airline said on October 29 it booked a loss of 1.94 billion yuan in the third quarter due to weak travel demand and fuel hedging loss of 961 million yuan.

In a statement to the Shanghai Stock Exchange Saturday, the company said it signed the contracts in July with the longest term till 2011 to mitigate the risks of future possible rises in fuel price.

Fuel costs account for more than 40 percent of the annual operating costs this year. "Controlling the impacts of rises in fuel price is key to sustaining the company's growth and maintaining the stability in its generation of profits," it stated.

The State-owned carrier said it signed the contracts "when international oil prices were at historical high levels and the general market consensus then was that high oil prices would prevail for a long period of time".

The cost of hedging only against the risk of rises in fuel prices was therefore considerably high, according to the statement.

The wrong-way bets made it to buy fuel at higher than spot prices when crude oil prices had plunged 66 percent from its peak of 147.27 U.S. dollars per barrel on July 11 on concerns over a deep and prolonged recession of the global economy.

As of October 31, the hedging contracts had not caused any actual cash loss and the actual loss depends on future movements in oil prices and adjustments of fuel hedging positions, it said.

The loss may be higher or lower than the fair value loss stated above, it added.

Earlier media reported that Air China, China Eastern Airlines and China Southern Airlines, the three State-owned carriers, were seeking government cash injections to cope with high costs and weak demand.

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