Though Chinese airliners, particularly China Eastern, have managed to trim their hedging losses thanks to recent rise in oil prices, analysts aver that the worst is still far from over for the beleaguered carrier.

The Shanghai-based carrier had reported a net loss of 13.93 billion yuan in 2008, a sharp fall from a net profit of 604 million in 2007, due to falling demand and huge hedging losses.

The carrier's earning per share (EPS) was negative 2.86 yuan, compared with 0.12 yuan in 2007.

According to its annual report, as of Dec 31, 2008, China Eastern's debt totaled 84.249 billion yuan, while its assets stood at 73.184 billion yuan, showing a deficit of 11.065 billion yuan.

With oil prices crossing the $60 mark, China Eastern is finding welcomed remiss from the running losses in fuel hedging contracts. Analysts said there still remains uncertainty over the hedging losses as its contracts are mostly due in 2010.

They add that much can change on the oil front between now and then. The actual magnitude of the loss will depend on the price change in coming months with the possibility of prices slumping again if the recession worsens.

In recent months, crude oil jumped 30.79 percent from a low of $48.65 per barrel, with benchmark crude for July delivery being quoted at $63.45 a barrel on the New York Mercantile Exchange on Wednesday.

Luo Zhuping, the carrier's board secretary, admitted that China Eastern has got some respite from the mounting losses. "With crude prices going up, China Eastern's hedging loss is decreasing," Luo was quoted by Securities Daily as saying.

In a statement issued on May 13, China Eastern said it had settled 916 million yuan losses in the due hedging deals in the first quarter.

But analysts said its paper loss associated with the fuel hedging in the first quarter crossed 5 billion yuan, meaning the windfall from the hedging deals can hardly wipe out the astronomical loss.

"Statistics indicate that the hedging deals have limited effect in protecting domestic carriers from possible price swings," said Li Qing, analyst, Hongyuan Securities.

"In the first quarter, crude oil dropped 40 percent year-on-year, while jet fuel costs fell 15 percent from the same period of 2008," he said.

Currently, rumors are rife that the Shanghai-based carrier is planning to scale back its hedging deals with seven investment banks.

A source close to the matter said China Eastern is in talks with Credit Suisse Group, Citibank, Merrill Lynch, Deutsche Bank AG, UBS AG, Goldman Sachs Group Inc and Morgan Stanley, for restructuring the signed derivatives trading deals.

"It is hard to exit the already signed contracts because of losses. It's the rule of the game. You take the gamble and respect the result," said the source. But he added, "If you can prove the contract has deceptive or ambiguous wording, things are different."

Li Lei, analyst, CITIC China Securities, said any reckless move could further hurt the carrier's deficit.

"Oil prices will see a steady pick-up from quarter to quarter as the worst is more or less over. Now, the only question lying ahead is when the economy will bottom out," said Li.

Calls to China Eastern went unanswered and reports said the carrier's negotiation with the investment banks was ongoing.

China Eastern said revenue hit 8.94 billion yuan in the first three months this year, down 15.7 percent, due to fewer passengers. During the same period, it realized a net profit of 40.10 million yuan, down 53.3 percent from a year earlier.

But analysts believe that the underdeveloped domestic demand, will see an upsurge soon and help narrow the carrier's huge losses.

In the last six months, the Shanghai-based carrier got a 9 billion yuan cash injection from the central government. China Eastern reported a 13.928 billion yuan net loss, with 115 percent debt-to-equity ratio in 2008.

(China Daily May 29, 2009)