March 11 (Bloomberg) -- Cathay Pacific Airways Ltd., Hong Kong’s biggest carrier, posted its first annual loss in 10 years after making wrong-way bets on fuel prices and suffering from slowing demand because of the global recession.

The HK$8.56 billion ($1.1 billion) net loss, or HK$2.175 a share, compared with a HK$7.02 billion, or HK$1.78, profit a year earlier, the carrier said in a Hong Kong stock exchange filing today. The second-half loss was HK$7.9 billion, about 12 times the size of the first-half loss, according to Bloomberg calculations.

Cathay Pacific had its first unprofitable year since the 1998 financial crisis after booking a HK$7.6 billion paper loss from fuel hedging. British Airways Plc and Delta Air Lines Inc., the world’s largest carrier, have also reported losses as business and leisure travelers pare flights amid a global recession and rising job concerns.

“It will take at least three years for travel demand to come back as the global economy recovers,” said Winson Fong, who helps manage $2 billion at SG Asset Management H.K. Ltd. “Things don’t look too optimistic, but, hopefully, they can make a small profit in 2009.”

Cathay Pacific made a HK$1 billion provision in its full- year results for expected fourth-quarter losses at affiliate Air China Ltd.

The airline “expects an extremely challenging year in 2009,” Chairman Christopher Pratt said in the statement.

Paper fuel-hedging losses this year totaled HK$1.9 billion as of the end of February, the carrier said.

Fuel Hedging

Cathay Pacific, China Eastern Airlines Corp. and Air China Ltd. all reported hedging losses after locking in fuel prices at higher than current rates. Fuel prices have plunged 74 percent from a record in Singapore trading in line with slumping oil prices.

It will cost the carrier $1.4 billion to settle fuel-hedges from this year to 2011 if Brent oil prices average $45 a barrel in the period, the airline said. If the average price is about $75, then the carrier would face no further cash costs from the hedges, enabling it recoup the provisions it made this year.

Crude oil for April delivery was at $45.76 in electronic trading on the New York Mercantile Exchange at 12:49 p.m.

Unpaid Leave

Cathay Pacific has curbed capacity growth, offered staff unpaid leave and delayed a new cargo terminal in Hong Kong by two years to mid-2013 on waning demand. It also scrapped its final dividend.

The airline, controlled by Swire Pacific Ltd., rose as much as 5 percent to HK$7.35 and traded at HK$7.30 as of 2:35 p.m. The carrier slumped 57 percent last year.

The record full-year loss, the carrier’s second since 1963, was in line with the HK$8.72 billion median of seven analyst estimates complied by Bloomberg. Annual sales climbed 15 percent to HK$86.56 billion.

Spending on jet fuel, including the paper-hedging losses, jumped 92 percent to HK$47.3 billion. Gross fuel costs rose 54 percent to HK$39.3 billion.

“Fuel costs were higher than expected, which offset the better-than-expected sales,” said Damien Horth, a UBS AG analyst.

Cathay Pacific and its Hong Kong Dragon Airlines Ltd. unit carried 25 million passengers last year, a 7.3 percent increase. Cargo volume fell 1.6 percent to 1.65 million tons.

Airlines worldwide lost as much as $8 billion last year because of the recession and fuel-hedging losses, the International Air Transport Association said on March 2. The industry may lose as much $2.5 billion this year as traffic declines, with carriers in the Asia-Pacific region accounting for almost half of the losses, it added.

Cathay Pacific may make a HK$696 million profit this year, according to the median of seven analyst estimates complied by Bloomberg.

To contact the reporter on this story: Wendy Leung in Hong Kong at wleung12@bloomberg.net

Last Updated: March 11, 2009 02:40 EDT