Singapore: A Merrill Lynch report says Air China Ltd, Cathay Pacific Airways Ltd and seven other Asian airlines may post a combined record loss of $6 billion (Rs29,340 crore) in 2008 due to wrong-way bets on fuel hedging and weakening demand.
Losses from contracts tied to fuel hedging accounted for $3.8 billion of the total estimated loss, the report by Bank of America Corp.’s Merrill Lynch and Co. said on Thursday. The carriers may lose a further $600 million this year as travel drops amid a recession. “The Asian airline sector faces the deepest and most prolonged downturn since the global recession of 1980-82,” analysts Paul Dewberry and YingYing Hou wrote. The first half of 2009 “is shaping up to be especially unpleasant as huge losses compound already stretched balance sheets”.
China Eastern Airlines Corp., Air China and Cathay Pacific have all posted paper losses from hedging because the price of jet fuel has plunged 69% from a 3 July record. Carriers agreed to hedging deals because fuel prices doubled in a year to hit the record. A global recession and the credit market meltdown have also cut travel.
In a tailspin: Air China planes in Beijing. China’s biggest overseas carrier expects to post its first annual loss in at least eight years. Doug Kanter / Bloomberg
Air China, the country’s biggest overseas carrier, expects to post its first annual loss in at least eight years because of wrong-way bets on fuel. Cathay Pacific, Hong Kong’s largest airline, will book a cash loss of about HK$300 million ($39 million or Rs190.7 crore) from hedging contracts exercised last year in its 2008 accounts, it said on 7 January.
Merrill’s $6 billion loss estimate for the nine Asian carriers is more than the $5 billion loss for global carriers that the International Air Transport Association, or Iata, had predicted. Iata last month forecast a $2.5 billion loss for carriers globally for 2009.
Asian airlines are also not cutting enough capacity to keep yields from sliding, according to the Merrill report.
Current capacity plans by Asian airlines, excluding China, point to a contraction of seats of only 1.6% in 2009, the report said. “This is not enough in our opinion, and will lead to sharper unit revenue declines than were seen in any major recent crises,” it said. Of the nine companies covered in the report, only Singapore Airlines Ltd, the world’s largest carrier by market value, is expected to post a profit in 2008, it said.
Air China is expected to return to a profit this year on expectations it will receive new funding. AirAsia Berhad, South-East Asia’s largest budget airline, will probably also post a profit this year as travellers opt for cheaper fares, the report said.
The other airlines include China Airlines and EVA Airways Corp., Taiwan’s two largest carriers, China Southern Airlines Co. Ltd, China Eastern Airlines Corp. and Korean Air Lines Co. Ltd.