China Eastern Airlines dropped 1.75 percent yesterday on speculation that the carrier may suffer a loss of 4.7 billion yuan (US$690 million) on hedging contracts.

The fair-value loss on the contracts widened to 4.7 billion yuan as of November 14, from 270 million yuan seen in the third quarter, because the Shanghai-based carrier hedged 36 percent of its jet fuel demand in a wrong bet on the direction of fuel prices, an industry source said.

The government has ordered China Eastern, the country's third-largest carrier, to stop its hedging practice and the carrier's stocks may be considered special treatment as its net assets will be negative this year, according to the source.

The carrier's board secretary, Luo Zhuping, didn't comment on the issue and said it is still under study.

China Eastern's asset-liability ratio reached 98.5 percent by the third quarter and it lost 2.3 billion yuan in the first three quarters. The carrier said in an earlier report that it has applied to the State Council for capital injection and sources said the amount may reach 3 billion yuan, which can reduce the ratio to 94.7 percent.

Its share price tumbled 1.75 percent to end at 3.93 yuan yesterday while the Shanghai Composite Index dipped 0.44 percent to 1,888.72 points.

Jet-fuel prices plunged 62 percent from its July peak, leaving airlines with contracts having to buy fuel for more than the market rates. China controls the price of fuel used on internal flights, while airlines have to pay international prices for overseas services.

Air China Ltd, the nation's largest international carrier, said over the weekend that its loss on hedging contracts reached 3.1 billion yuan as of October 31 from 1 billion yuan in the third quarter.

Among the country's three largest carriers, Air China operates the most number of international routes and is the most exposed to fluctuations in global jet fuel prices.

China Southern Airlines hedges less than the other two carriers.

Cathay Pacific Airways Ltd, Hong Kong's biggest carrier, estimated its hedging losses as of October 31 to come to HK$2.8 billion (US$361 million).

(Shanghai Daily November 25, 2008)