Last week we saw Cathay Pacific mark to market an unrealised fuel hedging loss of US$980mn.  This week we see China Eastern Airlines making a similar provision valued at US$908mn.  Both shares were battered on the news.  (see charts below) Cathay Pacific Airlines China Eastern Airlines Jet fuel prices have collapsed as fast as the decline in crude oil.  What surprised everybody was the rapid pace of decline (see jet fuel price chart below).  Given this and that no one could have expected it to fall so rapidly.....I think SIA must like the other airlines have some exposure. I have not spoken to the management of SIA but believe that a similar charge is likely for our local carrier.  In the past, especially when jet fuel prices were rising, SIA used to hedge 50% of its annual fuel requirements six months forward.  For the financial year ended Mar 31 2008 SIA's annual fuel bill was S$5.03bn or about 36% of total costs.  Assuming that they hedge 50% of their fuel needs forward and depending on when this was done - the hedge figure could be as much as S$2.5bn.   Anyway the fuel mark to market loss is an unrealised loss for a fuel hedge position....it should be a one off item which should at the point of announcement be received negatively but after that investors will start to focus on its recurrent core business. I think airlines will not do well when the global economy is in recession.   Firstly, unnecessary air travel will be curbed, travellers will trade down from business to economy and from economy to budget, load factors will come under pressure as will air fares - which will affect yields.  The plus side however is that fuel costs have fallen sharply and this should help mitigate the weakness in revenue.  Suffice to say, I think earnings will be done more so in calendar 2009 given that SIA's year end is March 31.   Like the newspaper and TV companies which are proxies for buoyant economic conditions, SIA is likely to be flying into turbulant air conditions which will impact earnings.   The SIA chart below shows that during SARs, the shares fell to a low of between S$7-8 and during the 1997 Asian financial crisis to between S$3-4 - i cant imagine that a similar derating will not occur this time around. Source: NRA Capital - Kevin’s Blog