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15th Mar 2015, 13:15
Fuel hedging seems like a good gig, I wonder who they answer too?
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Cathay Pacific Airways may post hefty fuel hedging losses
Carrier expected to report stronger profit of HK$3.4 billion for year despite taking a bad hit from locking in oil prices at higher than spot
Analysts polled by Bloomberg expect Cathay to post a net profit of HK$3.43 billion for last year, compared with HK$2.62 billion in 2013. Photo: AFP
Analysts polled by Bloomberg expect Cathay to post a net profit of HK$3.43 billion for last year, compared with HK$2.62 billion in 2013. Photo: AFP
Cathay Pacific Airways, which is due to post its annual results on Wednesday, may report hefty fuel hedging losses of up to HK$14 billion because it locked in fuel prices at higher than spot prices, which then plunged 50 per cent in the second half of last year.
That amount will not be reflected in its earnings for last year as most of it will go to reserves rather than profit or loss because of accounting rules.
Citi analyst Michael Beer said: "Cathay will report a mark-to-market loss of US$1 billion, if not more, for its hedging contracts that extend into 2018."
That loss would not affect the company's profit or loss in the period, he said.
"The only valuation-related impact of that will be a HK$7 billion dent on Cathay's book value - which is now at HK$66 billion, raising its price-book ratio," Beer said.
Two other analysts gave a similar estimate while one said the loss could be as large as HK$14 billion.
Still, analysts said the airline, like its rivals, benefited from the drop in fuel price to near six-year lows in the second half of last year as its fuel bill, which was HK$38 billion in 2013, accounted for nearly 40 per cent of total expenses.
Analysts polled by Bloomberg expect Cathay to post a net profit of HK$3.43 billion for last year, compared with HK$2.62 billion in 2013.
Bocom International analyst Geoffrey Cheng said: "Cathay's management gave guidance in November that it expected to incur hedging losses of HK$400 million to HK$500 million for the year after posting a hedging gain of HK$1.02 billion in the first half.
"Expect a bigger number [this] week because fuel price has dropped further after November," he said.
But exactly how much more would depend on the configuration of the hedge book, Cheng said, as different hedging instruments were considered effective or non-effective hedging in accounting terms, and only non-effective hedging went into the profit or loss account.
Cathay said in December it was 57 per cent hedged for its fuel consumption for this year at a Brent oil price of US$99 a barrel.
Beer said Cathay's forward hedging position meant it was likely to have less flexibility to trim fares than competitors with relatively smaller hedges.
Daiwa analyst Kelvin Lau said: "Gross yield at Cathay is expected to weaken in 2015 because of the decrease in revenue contribution from fuel surcharge, but net yield will be better because of fuel cost saving."
The International Air Transport Association expects jet fuel costs this year to average US$71.10 a barrel, reducing the airline industry's global fuel bill by US$83.6 billion.
Home Business Companies
Cathay Pacific Airways may post hefty fuel hedging losses
Carrier expected to report stronger profit of HK$3.4 billion for year despite taking a bad hit from locking in oil prices at higher than spot
Analysts polled by Bloomberg expect Cathay to post a net profit of HK$3.43 billion for last year, compared with HK$2.62 billion in 2013. Photo: AFP
Analysts polled by Bloomberg expect Cathay to post a net profit of HK$3.43 billion for last year, compared with HK$2.62 billion in 2013. Photo: AFP
Cathay Pacific Airways, which is due to post its annual results on Wednesday, may report hefty fuel hedging losses of up to HK$14 billion because it locked in fuel prices at higher than spot prices, which then plunged 50 per cent in the second half of last year.
That amount will not be reflected in its earnings for last year as most of it will go to reserves rather than profit or loss because of accounting rules.
Citi analyst Michael Beer said: "Cathay will report a mark-to-market loss of US$1 billion, if not more, for its hedging contracts that extend into 2018."
That loss would not affect the company's profit or loss in the period, he said.
"The only valuation-related impact of that will be a HK$7 billion dent on Cathay's book value - which is now at HK$66 billion, raising its price-book ratio," Beer said.
Two other analysts gave a similar estimate while one said the loss could be as large as HK$14 billion.
Still, analysts said the airline, like its rivals, benefited from the drop in fuel price to near six-year lows in the second half of last year as its fuel bill, which was HK$38 billion in 2013, accounted for nearly 40 per cent of total expenses.
Analysts polled by Bloomberg expect Cathay to post a net profit of HK$3.43 billion for last year, compared with HK$2.62 billion in 2013.
Bocom International analyst Geoffrey Cheng said: "Cathay's management gave guidance in November that it expected to incur hedging losses of HK$400 million to HK$500 million for the year after posting a hedging gain of HK$1.02 billion in the first half.
"Expect a bigger number [this] week because fuel price has dropped further after November," he said.
But exactly how much more would depend on the configuration of the hedge book, Cheng said, as different hedging instruments were considered effective or non-effective hedging in accounting terms, and only non-effective hedging went into the profit or loss account.
Cathay said in December it was 57 per cent hedged for its fuel consumption for this year at a Brent oil price of US$99 a barrel.
Beer said Cathay's forward hedging position meant it was likely to have less flexibility to trim fares than competitors with relatively smaller hedges.
Daiwa analyst Kelvin Lau said: "Gross yield at Cathay is expected to weaken in 2015 because of the decrease in revenue contribution from fuel surcharge, but net yield will be better because of fuel cost saving."
The International Air Transport Association expects jet fuel costs this year to average US$71.10 a barrel, reducing the airline industry's global fuel bill by US$83.6 billion.