Cathay issues profit warning

Cathay Pacific on Wednesday issued a profit warning for 2008, saying weak demand out of Hong Kong and China and losses from hedging fuel costs will hit hard.

      “Since the November announcement revenue has continued to weaken,” the airline said in a statement to the Hong Kong stock market. “The air cargo market ex-Hong Kong and Mainland China has been weak. Fourth quarter cargo loads and yields have declined significantly against the same period in 2007. The percentage year-on- year reduction in cargo revenue has been greater than that of passenger revenue.”

      In November, Cathay had warned investors that hedging losses would be deep as the price of crude oil nosedived. But the actual losses were steeper than first thought.

      Cathay Pacific said in its November announcement that unrealized mark to market losses on fuel hedging contracts as of Oct. 31 were estimated at HK$2.8 billion ($361 million). The updated losses are HK $7.6 billion ($980 million), caused by a further substantial reduction in the oil price between Oct. 31 and the end of 2008, it said. The oil price fell 69.1    percent from its peak on July 11 to Dec. 31, or from $147.50 to $45.59 per barrel.

      Cathay also said it is rolling its hedging losses into one year rather than spreading them over the next few years.

      “Were the mark to market losses as at 31st December 2008 to be spread over the financial years up to and including 2011 in which the hedging contracts mature, losses of HK$4.9 billion ($632 million) would be incurred in 2009, losses of HK$2.2 billion ($283 million) would be incurred in 2010 and losses of HK$0.5 billion ($64 million) would be incurred in 2011,” the airline said. “The accounting treatment by some airlines of profits and losses in respect of certain fuel hedging contracts can have the effect of spreading those profits and losses over the periods in which the hedging contracts mature.”

      But Cathay emphasized that falling fuel prices immeasurably help the airline’s bottom line, hedging losses or not.

      “The Cathay Pacific group has benefited (and will continue to benefit) from the reduction in oil prices notwithstanding the mark to market losses,” the airline said. “Had the jet fuel price remained at its July 2008 peak, the cash costs of obtaining fuel in 2008 would have been approximately HK$7.9 billion ($1 billion) higher than they proved to be. If oil prices are on average the same in 2009 as they were at the end of 2008, expenditure on fuel in 2009 will, on the basis of currently projected usage, be approximately HK$20.3 (2.6 billion) lower than in 2008.”

Source: American Shipper