Moment of truth for MAS

[Azri M. 0]

Other info worth noting:

Profit for the year ending 31/12/2008 was RM 245.7 mil as compared to 31/12/2007’s RM 852.7 mil.

 

Cash and cash equivalents declined by RM 0.86 billion to end year (31/12/2008) with RM 3.57 billion.

 

As at 19/2/2009:

Entered into various fuel hedging transactions for periods up to 31/12/2011 in lots totalling 17,350,000 barrel.

 

 

 

 

Yup. Which is something that goes unreported in the news at times. They just see the profits as profits.

I wonder how much losses in terms of ringgit they suffered because of the fuel hedging policy which if I remembered correctly about 64% of their flight requirement last year, and half of this year.

[Sing Yew 1]

And here are the Profit and Loss figures for the full year ending 31/12/2008

 

RM ‘000

Operating Revenue 15,035,303

Operating expenses (15,198,257)

Other Operating Income 466,001

Gains on sale of properties 2,410

Profit from operations 305,457

Finance Cost (60,770)

Share of results from assoc comps 19,974

Profit before tax 264,661

Taxation (19,086)

Profit after Tax 245,575

 

 

Operating Profit/Loss by Business Segments

RM’000

Airline Operations 295,595

Cargo Services 22,392

Catering Services 1,999

Others 6,652

Total before Eliminations 326,638

Eliminations (21,181)

Post Eliminations 305,457 These should tie up with the Profit from Operations figure

Edited February 26, 2009 by Sing Yew

[Waiping 12]

What are the "Other Operating Income"?

[Mohd Azizul Ramli 2]

I think Other Operating Incomes should include MRO and Charter services too. I wonder what is the disposed assets which contributed the MYR 13 million revenue. Anyway, kudos to MH for the achievement in this very difficult economic times.

 

From MSN

Agence France-Presse - 2/26/2009 10:20 AM GMT

 

Malaysia Airlines says 2008 profits down 71 percent

http://news.my.msn.com/regional/article.as...umentid=2635436

 

Malaysian Airlines said Thursday its profit plummeted 71 percent in 2008 due to the global slowdown and an overcrowded market, and that it would cut capacity by five percent this year. The national carrier said that net profit in the three months to December fell 81 percent to 46 million ringgit (12.5 million dollars) from 241.9 million ringgit a year ago.

 

For the full year, it posted net profit of 244 million ringgit, down from 851.4 million ringgit in 2007, and well short of its earnings target of 400-500 million ringgit for 2008.

 

Managing director Idris Jala, who has overhauled the airline after massive losses in 2005, said it was a major achievement to turn a profit in the fourth quarter. "This is solid performance, which shows that if we set our minds to do the impossible, we can do it. We maintained our profitability streak," he said in a statement.

 

Jala said that Malaysia Airlines had already taken "radical action" including offering ultra-cheap fares over the second half of last year. But he said that "bigger challenges lie ahead" and that the airline would cut capacity by 5.0 percent in 2009 after a 6.4 percent reduction in 2008, and trim costs by seven percent with a savings target of 700 million to 1.0 billion ringgit. "Never waste a good crisis as this is the time to do the impossible which you wouldn't be able to do under normal circumstances," he said.

 

Jala did not rule out the prospect of an alliance with another airline to survive the tough times. "There will be a tremendous push for consolidation if airlines cannot get out of the red. We will continue to seek opportunities which provide a solid, and right, platform for Malaysia Airlines," he said.

[BC Tam 2]

"Never waste a good crisis as this is the time to do the impossible which you wouldn't be able to do under normal circumstances,"

 

Jala did not rule out the prospect of an alliance with another airline to survive the tough times. "There will be a tremendous push for consolidation if airlines cannot get out of the red

 

Try tie these quotes in with following observations

1) black leather seats in all economy layout of MH's new 738s, reflecting AK's 320s

2) similarities in 'zero fare' promotions

3) AK bleeding red ink recently

4) sudden lack of urgency in constructing new LCCT, from the very recent "we will die" dramatics

 

So, who is willing to take bets on an MH/AK merger or takeover already ?!

[Jessnor Arif 1]

1) black leather seats in all economy layout of MH's new 738s, reflecting AK's 320s

 

This is quite misleading. completely ignoring the fact that MH do not reconfigure the leased B738.

I dont think MH is thatd10t reconfiguring the B738 but not include J class seat then sell it as one.

[Walter Sim 1]

He's joking lah Jess hehehe.

[KK Lee 5]

Cash and cash equivalents declined by RM 0.86 billion to end year (31/12/2008) with RM 3.57 billion.

 

A reason could be reduction in advanced ticket purchase

 

As at 19/2/2009:

Entered into various fuel hedging transactions for periods up to 31/12/2011 in lots totalling 17,350,000 barrel.

 

What was the price this fuel was hedged at? A US$30 loss per barrel will total to US$500+ million! =@

 

 

 

[KK Lee 5]

Malaysia Airlines reports profits despite industry downturn, expects tough year ahead

By Lee Wei Lian

 

KUALA LUMPUR, Feb 26 — Malaysia Airlines Bhd reported its tenth consecutive profitable quarter in a row despite challenging conditions in the airlines industry.

 

The national carrier recorded RM46 million in net profit for the fourth quarter ending 31 December 2008, an 81 per cent drop over the corresponding quarter in 2007, due to falling demand.

 

The outlook for 2009 remains difficult with the airline’s CEO Idris Jala admitting that he considers this year to be “extremely challenging”.

 

To counter the downturn in the industry, Malaysia Airlines will be reducing its budget by 7 per cent and expects to save between RM700 million and RM1 billion this year. The airline is also expected to cut its capacity by 5 per cent for this year in order to try and maintain profitability. Idris indicates that the capacity cuts will be in terms of flights rather than routes.

 

Despite challenging conditions, Idris points out that most other airlines are loss making. “Most other airlines are already in the red. We are still profitable,” he said. “What the industry needs to do is deal with overcapacity.”

 

The results were more or less in line with market expectations but analysts say the airline’s fuel hedging contracts will be its biggest challenge for this year. Malaysia Airlines has hedged 64 per cent of its fuel at US$100 (RM370). Oil prices today are at about US$40.

 

“The hedging of fuel at US$100 means that they are effectively selling expensive seats at cheap prices,” says Hafriz Hezry, an analyst with Ambank Research. “The losses from the fuel hedge will still be there but the fuel surcharges will have to go in order to counter falling demand.”

 

“When demand is weak, everyone removes the fuel surcharge,” says Ng Sem Guan, an analyst with OSK Research.

 

Ng is lowering earnings projections for this year and says that he expects Malaysia Airlines to make a minor profit or just break even.

 

Hafriz says that the true picture for the fourth quarter were masked by forward bookings and fuel surcharges which helped mitigate the hedging losses. He expects declines in yield to be more obvious by the second quarter of this year.

 

The fourth quarter profit brought total profit for FY08 to RM244 million. Revenue increased 2 per cent to RM15.5 billion while savings from cost cutting measures in areas such as leasing, amounted to RM936 million.

 

In the past year, about 30 airlines have declared bankruptcy and many posted losses up to December 2008. Airlines reporting losses include British Airways which reported a loss of about US$213 million (RM745.5 million) and Thai Airways which reported a loss of about US$203 million (RM710.5 million).

 

While jet fuel prices have declined, the global economic downturn has adversely affected demand for airline travel.

 

http://www.themalaysianinsider.com/index.p...conomic-turmoil

 

 

If current market price persists, MH is paying over US$1,000m+ more for fuel from hedging

 

Any head rolling or will get promotion?

 

Edited February 26, 2009 by KK Lee

[Kenneth T 0]

May i know when is the fuel hedging is expected to expire?

[BC Tam 2]

What was the price this fuel was hedged at? A US$30 loss per barrel will total to US$500+ million! =@

 

Malaysia Airlines has hedged 64 per cent of its fuel at US$100 (RM370). Oil prices today are at about US$40.

 

Simple maths, fuel hedge loss of US$60 per barrel, double your estimation

So, does that mean MH is staring at a US$1,000,000,000+ paper loss already ? ie. =@ =@ =@

[Azreen 0]

Simple maths, fuel hedge loss of US$60 per barrel, double your estimation

So, does that mean MH is staring at a US$1,000,000,000+ paper loss already ? ie. =@ =@ =@

 

 

Can the accountants in this forum shed some light into how fuel hedging losses/gain is taken up in the books?

[Sing Yew 1]

Can the accountants in this forum shed some light into how fuel hedging losses/gain is taken up in the books?

 

I think usually the airlines would have to account for the fuel hedging losses as a cost i.e. an expense item for this case, it'd probably be recognised under Fuel Costs.

 

 

The International Accounting Standards Board's (IASB) issued Standard 132 re Financial Instruments - Presentation. In accordance to the accounting standard, any hedging contracts would be considered as a financial instrument and therefore any interest, dividends, losses and gains relating to a financial

instrument or a component that is a financial liability shall be recognised as income or expense in profit or loss.

 

I think the Malaysian Accounting Standards Board has harmonised IASB 132 with FRS 132. Perhaps any accountants/auditors based in Malaysia can confirm that. So if that's the case, those fuel hedging losses would be booked as an expense and thus be reflected in the Profit and Loss (Income Statement).

 

 

 

 

[Mohd Suhaimi Fariz 2]

So, who is willing to take bets on an MH/AK merger or takeover already ?!

 

I seriously doubt any merger between the two. Won't make economic sense. If MH takes over AK, then AK staff surely wants to be on the same level as MH staff, salary-wise. Bang goes the whole low cost structure. Not to mention the fact of incompatible equipments.

[Radzi 2]

There is still some "Conspiracy theory" thought by some MH employees that the new PM will direct MH to cancel the purchase of the B738s, in its place to get the A320s already ordered by........

 

I hope this will remain a fantasy.

[Sing Yew 1]

A reason could be reduction in advanced ticket purchase

 

Sale in Advance of Carriage (Liability) fell from RM 1.56 billion (31/12/2007) to RM 1.22 billion (31/12/2008)

 

What was the price this fuel was hedged at? A US$30 loss per barrel will total to US$500+ million! =@

 

 

Not too sure about that.

[KK Lee 5]

 

Believe fuel hedging will be taken up when consumed in P&L. Unless MH can improve yield (i.e. ticket price) substantially, MH is unlikely to declare significant profit for the next 3 years, and IJ will continue with his favourite tools i.e. cut cost, cut capacity, cut route, etc.

 

If without AK, the gomen would have bail out MH like airlines in China.

 

 

[KK Lee 5]

Wonder why MH didn’t unwind those fuel hedging deals like AK did?

 

 

Edited February 28, 2009 by KK Lee

[BC Tam 2]

The International Accounting Standards Board's (IASB) issued Standard 132 re Financial Instruments - Presentation. In accordance to the accounting standard, any hedging contracts would be considered as a financial instrument and therefore any interest, dividends, losses and gains relating to a financial

instrument or a component that is a financial liability shall be recognised as income or expense in profit or loss.

 

I think the Malaysian Accounting Standards Board has harmonised IASB 132 with FRS 132. Perhaps any accountants/auditors based in Malaysia can confirm that. So if that's the case, those fuel hedging losses would be booked as an expense and thus be reflected in the Profit and Loss (Income Statement).

Fascinating insight from an obvious pro in the field ! Thanks

 

Is there any obligation as to when one has to realize those losses/profits ?

Meaning, is one at liberty to either KIV the issue (hedging loss, delay unwinding in hope losses will be less nearer contact expiration) or book in any profit earlier ?

 

 

Wonder why MH didn’t unwind those fuel hedging deals like AK did?

Might unfavourably affect certain individual(s) KPI rather drastically?

Edited February 28, 2009 by BC Tam

[Sing Yew 1]

Fascinating insight from an obvious pro in the field ! Thanks

 

Is there any obligation as to when one has to realize those losses/profits ?

Meaning, is one at liberty to either KIV the issue (hedging loss, delay unwinding in hope losses will be less nearer contact expiration) or book in any profit earlier ?

 

Far from being a pro BC. Still climbing the steep learning curve.

Had a quick look at the Malaysian Accounting Standards Board's website and it seems that FRS 139 - Financial Instruments: Recognition and Measurement which is to be applied alongside FRS 132 will only be made effective from 1 January 2010 onwards. So MAS may not have had to comply with FRS 132 as yet.

 

There was a news article in today's Star newspaper that reported about MAS' potential losses due to hedging costs and if that's really the case, it would potentially reverse all the profits made in the past couple of years:

 

MAS stands to lose RM3bil in hedging costs

By YVONNE TAN

 

PETALING JAYA: Malaysia Airlines (MAS) stands to chalk up close to RM3bil in hedging costs over the next two years while its competitor AirAsia Bhd enjoys the benefits of lower crude oil prices, analysts say.

An analyst estimated that MAS was currently sitting on a collective paper loss of around RM2.8bil for financial year 2009 and 2010 as a result of its hedging activities.

 

MAS has hedged 64% of its fuel requirements for financial year (FY) ending Dec 31 at US$100 per barrel and 40% of FY10 at US$95 per barrel while crude oil is hovering around US$40 per barrel. The analyst estimates MAS using up to 16 million barrels of crude oil per year.

 

“It is paying higher for crude as it has locked positions at US$100 and US$95 a barrel whereas the current price is only around US$40 a barrel,’’ the analyst said. The national carrier does not book any losses as it does not adopt the mark-to-market practice, which essentially means assigning a value to a position held in a financial instrument based on current market price.

 

Kenanga Research said MAS’ FY09 hedge price was much higher than the figure revealed last year, which was 53% of FY09 crude at US$83 per barrel. “We suspect that the increase in FY09 hedge price could be due to non-linearity and complexity of the hedging instruments involved. As there are more than 80 fuel hedge instruments available in the market, these complicated derivatives when combined might have an adverse effect should spot prices reach a certain threshold,” it said.

 

While analysts have raised concerns about MAS’ pricing ability which could be handicapped by its fuel hedge, they are equally concerned about AirAsia’s associates’ longer term prospects as these continue to gush red ink.

However, AirAsia said it is now free of hedging contracts but not without having immense pressure on its profits in the second half of 2008. But going forward, AirAsia is in a better spot as it is paying market prices. AirAsia posted hefty losses of RM425.7mil in its latest quarter from the unwinding of its fuel hedge and interest rate swaps positions, which resulted in its exceptional losses increasing to RM833.4mil for FY08.

 

The low-cost carrier had been buying fuel at spot price since the fourth quarter of last year and would start “on a clean slate” where hedging was concerned, analysts said.

Hedges are essentially derivatives which airlines use to lock in a fuel price in advance to protect themselves from price volatility.

 

The airline industry was plagued by record crude prices, which influenced jet fuel prices in the first half of last year.

“Airlines entered into their hedging arrangements when it seemed that oil prices would not see their limit and that is why MAS is still paying more than double the current price,” an analyst noted.

 

The global economic crisis has since brought prices well below the forecasts made by airlines when they bought into their respective hedges.

 

http://biz.thestar.com.my/news/story.asp?f...mp;sec=business

 

[BC Tam 2]

The national carrier does not book any losses as it does not adopt the mark-to-market practice, which essentially means assigning a value to a position held in a financial instrument based on current market price.

Ok, that clears up the issue. Thanks !

 

Which essentially means any time bomb or gold mine the company is sitting on, can remain transparent in as far as its financial reports are concerned, if it so chooses, until due date of the deals

 

Even then, the losses/gains from such deals need not be itemized separately ? Meaning such hedging losses can be incorporated in 'fuel costs' ?

[BC Tam 2]

Even then, the losses/gains from such deals need not be itemized separately ? Meaning such hedging losses can be incorporated in 'fuel costs' ?

 

In accordance to the accounting standard, any hedging contracts would be considered as a financial instrument and therefore any interest, dividends, losses and gains relating to a financial instrument or a component that is a financial liability shall be recognised as income or expense in profit or loss.

 

Ok, previous question redundant - sorry