Cathay burnt by low cost fuel

CATHAY Pacific Airways’ shares fell abruptly yesterday after it revealed that it stood to lose US$1 billion due to hedging fuel prices.

It had, as many carriers did, signed contracts earlier in the year with fuel supplies limiting the cost of its fuel when the price of oil was hitting new heights. But now with the cost of oil falling along with traffic the decision is proving a mistake.

“What Cathay has done is taken some risk and it’s backfired,” said Damien Horth, Asia transport analyst at UBS in Hong Kong. “I am sceptical on the economic benefit of hedging for airlines,” he said.

Most of the predicted losses take into account the full-life of the contracts, which run until 2011. Should the price of oil rise again, which speculators estimate should be in the third quarter of this year, then the losses will be less.

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