Cathay Pacific Airways, burnt by fuel hedging contracts, is expected to post a record loss for last year after posting a record profit in 2007. The amount of red ink analysts expect ranges from HK$1.23 billion to HK$11.24 billion, according to Bloomberg, with the mean estimate for a loss of HK$7 billion to HK$8 billion. The drastic change in Cathay's bottom line is unprecedented, reflecting the perfect storm that the carrier has run into during the past year. Like most of its peers, Cathay Pacific was first hit by skyrocketing oil prices in the first half. Then the aviation industry fell into a tailspin from the financial crisis, which curtailed air traffic demand, especially in business and first class, which make up 8 per cent of total passengers but 15 to 20 per cent of revenue. Cathay spoke of the impact on premium traffic in September, saying 15 of its top 20 corporate clients who usually travel in the front-end of the cabin are related to the financial sector. In addition to weakening business traffic, discretionary travel at Cathay also showed signs of softening. The combined passenger traffic figure fell for two out of the three months in the fourth quarter. Carriers in the United States, where the crisis began, ironically are better cushioned from the downturn because most of them reduced capacity in the first half by grounding aircraft. That is because the average age of the US fleet is much older than that of Asian carriers and is more vulnerable to high oil prices. Cathay Pacific, on the other hand, had not reined in its capacity until the end of last year. It said it would ground three cargo freighters and retire four classic freighters, Boeing 747-200Fs, this year. However, on the passenger side, it said in December that capacity would be at the same level as last year. 'We think 2008 will be the worst year of this downturn for Cathay,' said Damien Horth, a transport analyst at UBS, in a recent report. He expects it will report a HK$6.9 billion loss for last year. 'Oil prices hurt 2008 first-half earnings and rapid capacity growth compromised management's ability to manage yields up.' In 2008, Cathay Pacific's passenger capacity, which measures available seat kilometres grew 12.7 per cent, while its passenger revenue traffic, measuring revenue passenger kilometres increased 11.2 per cent. Cargo capacity, or the available tonne kilometres, increased 5.8 per cent, while cargo traffic decreased 0.7 per cent. The declining load factor, or the percentage of seats sold and cargo space packed, hindered the profitability of the carrier. If passenger traffic is a sign of concern, the cargo division is even more worrisome. Cargo and mail carried by the carrier dropped 26 per cent in January, following a 23.9 per cent decline a month earlier. Sales from cargo generally make up about 10 per cent of revenue for most airlines but Asian carriers are much more reliant on cargo sales. About 17.5 per cent of Cathay's sales in 2007 were generated by its cargo division. Adding to its woes is the massive unrealised loss from fuel hedging. Cathay Pacific increased its fuel hedging position to 50 per cent of fuel consumption from 35 per cent at a time when oil prices hit records last July. Since then, the abrupt decline in prices - to about US$46 per barrel at the end of December from US$147 per barrel in July - caused HK$7.6 billion in unrealised losses at Cathay last year. Daiwa Institute of Research predicted Cathay would report HK$6.6 billion in losses for last year, while Citigroup anticipated a loss of HK$11.2 billion on deteriorating passenger and cargo yields. Some of the paper losses would be written back when oil prices exceed US$46 per barrel by the end of this year. Also, lower oil prices could decrease the actual fuel bill of the company. Some analysts still think the airline could be better off this year due to lower oil prices as well as the shrinking in airline capacity industry-wide. They believe the Asia-Pacific region will be the first area to rebound once the industry starts to recover. And, the proximity of Cathay's home base to the mainland provides it a better shelter from the shattering operating environment. However, when the industry hits bottom and when the global economy starts to revive are hard to determine.