The mainland's commercial airline industry could grind to a halt if the country's monopoly jet fuel supplier, China Aviation Oil Holdings (CAOH), is unable to come up with a rescue package for its Singapore-listed trading subsidiary, which has run up losses estimated at US$550 million from a series of speculative derivative punts against the value of jet fuel. CAOH said in a statement yesterday that there was 'little or no reasonable prospect of [China Aviation Oil (Singapore)] having sufficient cash flow to ... continue with its core business of jet fuel procurement' without a stay against claims being made against CAOS by counterparties of its derivatives trades. CAOS, which until recently had been a darling of Singapore investors, supplies virtually all of the jet fuel sold by its parent in the mainland. As such, CAOH said it was working to complete a restructuring of the Singapore subsidiary's debts through a scheme of arrangement that would allow any cash from its receivables and assets to be used solely for the core business of jet fuel procurement until a settlement was reached with creditors. Separately, CAOH said it was negotiating with Singapore government-linked investment firm Temasek on a rescue plan through a proposed deal that would see CAOH and Temasek inject up to US$100 million, in aggregate, into CAOS in return for a jointly held majority stake. Temasek now holds a 2 per cent stake in CAOS. CAOS investor relations manager Jennie Liu declined to comment, directing inquiries to an external consultant appointed by the company as its spokesperson on the issue. But calls to the consultant were not returned. It emerged on Tuesday that CAOS had been hit with losses estimated at US$550 million, having taken a number of open derivatives positions on the price of crude oil - when it was trading at about US$30 per barrel - and betting that prices would fall. In October, when oil prices rocketed to a high of more than US$55 per barrel, it faced significant margin calls on those positions that it was unable to pay. CAOH said it then made a US$100 million emergency loan to its subsidiary, but that sum 'quickly proved to be insufficient to satisfy the' losses and a more complete rescue proposal would have to be found. From October 26 to now, the accumulated losses on positions that have been closed total about US$390 million, while losses from remaining open trading positions are estimated at US$160 million. CAOS chief executive and managing director Chen Jiulin has been suspended of his duties and a CAOH team has been sent from Beijing to take over day-to-day operations and investigate the cause of the losses. It is unknown whether CAOS' ill-fated speculation was authorised by its parent. The CAOS troubles also pose a question about the integrity of the mainland's jet fuel supply, if the creditors do not agree to the CAOH rescue scheme and Beijing does not commit to a separate jet fuel source. There is no published data on the amount of fuel stock now on hand in mainland airports, but CAOS normally commits to deliveries over a three-month stream, with a half-year lead time. This implies there is now a contracted fuel supply to June. China Southern Airlines company secretary Su Liang said he did not think the supply of aviation fuel in the mainland would be adversely affected by CAOS' troubles. The Singapore stock exchange has ordered an investigation into the affair, mainly on why it took the company more than a month to report its financial difficulties from the time they occurred. It is also odd that on October 21, CAOH hurriedly sold a 15 per cent stake in CAOS through Deutsche Bank at a 14 per cent discount, raising US$117 million. Bloomberg quoted a CAOS spokesman at the time as saying that the parent 'had an investment they are making and they need to raise the cash'. The spokesman added 'they wanted to get the deal completed as soon as possible'. Early last year, Mr Su told the South China Morning Post that rule changes had permitted mainland carriers to begin dabbling in jet fuel futures, allowing them to hedge small amounts of international-use oil, which makes up about 10 per cent of their fuel demand. Some China Southern employees, along with executives from China Eastern Airlines and Air China, had been sent to CAOS to receive training. Mr Su said yesterday that no direct hedging was being done by China Southern as capital control regulations still made direct hedging by the airlines in international markets unworkable. China Eastern company secretary Luo Zhuping said the difficulty lay in there being no commodities financial markets in the mainland. 'If we engaged in hedging activities, we would have to do it offshore. But the capital controls on the yuan make such activities unwieldy,' he said. Mr Luo said that if a mainland airline needed to pay for an overseas asset such as aircraft in a foreign currency, the transaction had to be done through the Beijing authorities, which would then bill the airline in yuan. 'That works for aircraft purchases, but I'm not sure that I could go to Beijing with a request to purchase a fuel hedging contract in US dollars,' he said.