Air China predicts big losses for 2008

Air China, the state-owned flag-carrier airline of China and the country’s largest international carrier, said it was expecting huge losses for 2008 because of the downturn in global traffic demand and the high prices of aviation turbine fuel during most part of the year.

The airline said its loss would be “significant.” It is scheduled to announce results for 2008 in the middle of April 2009, an official statement said.

Air China had, in 2007, earned a net profit of 3.88 billion yuan ($568 million).

China Southern Airlines and China Eastern Airlines – the two other major airlines of China – also have forecast that they would suffer losses for 2008.

Air China’s passenger numbers dropped by 1.7% in 2008 to 34.2 million – the first fall in five years. In addition, Air China’s cargo and mail volume declined by 3.8% to 898,962 tons.

In a statement, Air China estimated that, thanks to the drop in the prices of oil late in 2008, fair value losses on its fuel hedging contracts had risen to 6.8 billion yuan at the end of 2008 from 3.1 billion yuan in November 2008. However, the airline added, those losses could change during the remaining period of the contracts and that the drop in oil prices had also helped the company reduce its costs for spot oil buying.

The Air China statement went on to explain that fair value loss from fuel hedging contracts as of December 31, 2008, had increased to 6.8 billion yuan because of volatility in the prices of crude oil  and that the carrier paid US $52.80 million for the loss in December 2008.

According to the company, the losses from fuel hedging were bound to have a considerable impact on its performance in 2008.

Air China also blamed the huge earthquake that rocked Sichuan Province, the volatility of oil prices during the Beijing Olympics as well as the global financial crisis for its poor performance in 2008.

The website xinhuanet.com quoted a financial analyst in Shanghai as commenting on Air China’s prediction of losses: “Air China is more exposed to the global crisis than China Southern and China Eastern and, as such, most of its advantages turned into disadvantages in 2008.”

Data compiled by analysts show that Air China has been making profits at least since 2000, thanks mainly to the carrier possessing a wider overseas network than its domestic rivals.