Fuel hedging bets cost Cathay Pacific $1bn

Cathay Pacific acknowledged paper losses of nearly $1bn (£657m) yesterday as the airline's fuel hedging policy backfired thanks to dramatic falls in the oil price.

Last November, the Hong Kong-listed airline was already booking mark-to-market losses of HK$2.8 billion (£237m) on fuel hedging contracts, based on the oil price at the end of October. But with the oil price languishing around $45 per barrel by the end of the year - from July's unprecedented high of $147 - mark-to-market losses nearly tripled to HK$7.6bn ($980m, £644m).

Cathay emphasised in yesterday's Stock Exchange statement predicting "disappointing" full-year financial results that future fluctuations in the oil price could ameliorate the as-yet unrealised hedging losses, and also that such losses are accounted for in a single financial year, rather than spread over the full period in which the contracts mature. But despite the attempts to put the figures in context, the company's shares closed down 7.6 per cent at HK$8.97.

Airlines around the world are suffering as the dire effect of the ballooning oil price gives way to the book losses of hedging contracts entered into when it was still high. Passenger numbers are also falling off dramatically as straitened economic conditions bite on both consumer and business travelling.

"Since the November announcement revenue has continued to weaken," Cathay Pacific said. "First and business class traffic in particular have fallen significantly and this decline, and the impact of currency movements, have caused a weakening of passenger yields."

The outlook is no more positive. Not only are advance bookings for the first quarter of the new year are markedly down on the same period of 2008, according to yesterday's statement. But the cargo market is also being badly affected. "The percentage year-on-year reduction in cargo revenue has been greater than that of passenger revenue," Cathay Pacific said.

The Asian group is not the only carrier to be hurt by hedging gone wrong. In November, Ryanair reported first half profits down by almost half because the budget Irish carrier had not hedging in place to take the sting out of the rocketing oil price in the six months to July.

Attempting not to be caught out again, Ryanair had 25 per cent of its 2009/10 fuel requirements hedged at the equivalent of $77 per barrel at the end of 2008, and said this week that the arrangement has been extended to cover 50 per cent of requirements for the first three quarters of the year at an equivalent of $64 per barrel of crude.

Michael O'Leary, the Ryanair chief executive, said: "This will lock in a 42 per cent reduction of our hedged fuel cost per passenger compared to fiscal 2008/09, and will enable Ryanair to continue to grow traffic and reduce fares during these recessionary times."