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China Eastern will cut hedging

CHINA Eastern Airlines Corp, the nation's third-largest carrier, will cut fuel-hedging positions this year after losses from wrong-way bets on prices widened to about 7 billion yuan (US$1.02 billion), a company executive said yesterday.

The carrier expects to reduce fair-value hedging losses to below 6 billion yuan as it closes contracts and because crude prices may climb to US$50 a barrel, said the executive, who declined to be identified as he isn't authorized to reveal the information. Paper losses stood at 6.2 billion yuan at the end of December, the company said last month.

China Eastern, Air China Ltd and Cathay Pacific Airways Ltd have all had unrealized hedging losses after buying fuel contracts in anticipation of rising prices. Instead, prices have fallen 71 percent from a record because of slumping oil prices and waning travel demand stemming from the global recession.

"It's an active move to reduce risk," said Jack Xu, an analyst at Sinopac Securities Asia Co in Shanghai. "Still, carriers will face a more difficult situation in the air-travel market this year."

China Eastern hedges 36 percent of jet-fuel needs, the executive said. Its paper losses grew after oil fell below US$35 a barrel this month, he added.

The Shanghai-based carrier has drawn up 256 cost-cutting measures and it aims to pare spending by 3 billion yuan this year, Chairman Liu Shaoyong said on February 3. It has also won credit lines totaling 35 billion yuan from the Agricultural Bank of China, Shanghai Pudong Development Bank Co and the Bank of Communications Co in the past two months.

The carrier, which has secured a 7-billion-yuan government bailout, is axing plane deliveries, planning asset sales and cutting management pay as it strives to break even next year. The airline is targeting a "significantly" smaller loss this year, likely to be its fourth unprofitable year in five.

China Eastern closed unchanged at HK$1.08 (14 US cents) in Hong Kong. The stock gained 0.6 percent to 5.41 yuan in Shanghai.


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