Six major things MAS should've hedged

[KK Lee 5]

Six major things MAS should've hedged

Very Concerned Citizen | Jun 8, 09 5:23pm

 

1. MSS - The MAS Mutual Separation Scheme

 

Rather than retrenching the staff that cost the public a cool RM500 million in 2006, MAS could have adopted the following strategy (still relevant now) to resolve problems MAS faced then:

 

a. Spinning off the Engineering and Cargo Divisions (thus reducing the staff numbers by nearly 6000 but with zero cost)

 

b. Lifo: Last in, First Out (Not Fifo - First in, First Out whereby many employees who were near retirement age were retrenched according to one standard formula instead of another alternative option)

 

c. Engaging proven local experts to carry out a third party audit/surveillance and propose recommendations (not the expensive and yet unproven foreign consultant).

 

Based on the FY2007 financial report, MAS employee strength was reduced from 18,641 (2006) to 17,991 (2007) but staff costs escalated from RM1.872 billions (2006) to RM2.001 billion (2007). So where are the cost-cutting measures?

 

Even with the over-hyped BTP (Business Transformation Plan), sure enough they are now facing bigger problems because instead of looking at intrinsic quality and efficiency, they brought in more new personnel (again with zero aviation knowledge) so much so that MAS is now top heavy and sluggish and rather than being a leader.

 

They tend to trail AirAsia's business strategies (remember the advertisement colour scheme, ELF (Everyday Low Fares) etc?

 

Is rewarding failure a new Malaysian way of life? I am referring particularly to the exorbitant RM495.5mil in payouts by MAS under its Mutual Separation Scheme. A news report on Aug 24, 2006 said a MAS employee received a whopping RM699,000 ‘golden handshake.'

 

The other payouts include 39 employees receiving between RM500,000 and RM600,000; 79 employees between RM400,000 and RM500,000; 323 employees between RM300,000 and RM400,000; 635 employees between RM200,000 and RM300,000; 781 employees between RM100,000 and RM200,000 and 742 employees up to RM100,000.

 

MAS is in its present state mainly because of the failure of its management and as such the management, especially top management, should be held accountable and take a big cut in their salaries.

 

Instead of retrenching workers through a voluntary or mutually agreed separation scheme, it could cut salaries starting from the top and redeploy its workers. As one would reward success with bonuses and promotions and other perks, it is only logical and prudent to institute some form of ‘punishment' for corporate failures.

 

The MAS ‘golden handshake' is unprecedented and it is ultimately taxpayers' money, as the government is a major stakeholder. Obviously it is not MAS directors' own money that is being paid out but public funds.

 

We should not encourage a culture where we reward failure; decision-makers must take the rap for their actions.

 

Otherwise we will have (if it is not being widely practised already) recalcitrant company bosses paying very high salaries to under-performing employees through favouritism or other shady means and unscrupulously sacking or forcing good workers into resigning.

 

2. Capital injection of RM3.67 billions in 2007

 

With reference to MAS' five-year financial performance ending 2007, there was a huge increase in cash and bank balances in 2007 in excess of RM3.67 billion as compared to 2006.

Questions:

 

a. Where did the huge capital injection of RM3.67 billion comes from?

 

b. Why does MAS need to borrow RM859 million when they have sold fixed assets for RM594 million and increased the shareholders equity to RM3.9 billions in 2007 from RM1.8 billion in 2006?

 

c. Why does MAS need to hold RM5.25 billion in cash and bank balances whereas in the past five years, their average balances were only around RM2 billion?

 

From the above performance, it clearly illustrates that in FY2007, profit of RM852 million was not gained from operations but ‘creatively' generated by selling her fixed assets and borrowings of RM859 million.

 

3. Continued purchase of the A380 and late decision on the B737-800 orders in 2008

 

Even though the Airbus A380s were ordered circa 2005, MAS missed a golden opportunity to cancel the order in 2007 because of manufacturing defects faced by Airbus. MAS has been extremely lucky that the A380 delivery was further delayed to 2012.

 

Imagine what would happen if MAS had the aircrafts now especially with the severe global economic downturn. We would have been worse off compared to SIA, Qantas and Emirates.

 

A former MAS MD, who has been keeping a very close eye on MAS, said in June 2006 that ‘their argument is that SIA, Emirates and Qantas have it, so we too must have it to be (in sync) with the market'. This reasoning demonstrates poor business sense and justification.

 

4. Safety issues

 

Two very serious incidents involved a Saudi Arabian B747-300 (wet-leased from Air Atlanta) that caught fire in Bangladesh (it subsequently written off due damage beyond repair) and another Saudi Arabian B777 which suffered extremely expensive damages to both engines.

 

Yet, not many personnel have been informed about the real cause of these expensive and potentially fatal incidents and preventive measures being taken to avoid similar incidences.

 

5. Fuel hedging

 

As at Feb 19, 2009, the group has entered into various fuel hedging transactions for periods up to Dec 31, 2011 in lots totaling 17,350,000 barrels.

 

The accounting policy adopted is to charge related expenses as fuel cost in the financial statements upon the expiry of fuel hedging contracts.

 

The fuel hedging programme is closely monitored and is subject to the vagaries of the market such as geopolitical events, the economic situation and weather conditions.

 

Below, I reproduce two news reports:

 

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 Star, March 5, 2009.

 

And

 

‘Personally, airlines should not hedge their fuel price too far forward. They should look at their business model,' said a veteran trader, who declined to be named. ‘Most airlines sell their tickets about two to three months in advance, and I believe that airlines should then hedge two to three months forward,' said one veteran trader. ‘Never one to two years in advance - I'd call that speculative trading.' - Reuters, March 20, 2009

 

6. I rest my case.

 

As at Dec 31, 2007, MAS had RM5.25 billion in cash and bank balance sand as at Dec 31, 2008, MAS had a cash pile of RM3.57bil. Where has the RM1.68 billion gone to?

 

And why the need to buy an airline which normally gives a return of 2% - 5% p.a.? The cash will be better spent if MAS buys back GE Engine Services which can easily give a return of 20% - 30 % p.a.

 

I quote:

 

‘Petaling Jaya: Malaysia Airlines (MAS) is looking to acquire another airline with its surplus cash. As at Dec 31, 2008, MAS had a cashpile of RM3.57bil.

 

Managing director Datuk Seri Idris Jala said tough economic times presented opportunities for consolidation. Companies with huge financial muscle will have the flexibility to act should opportunities come knocking.' - The Star April 16, 2009

 

http://www.malaysiakini.com/letters/106048

 

 

[Mohd Azizul Ramli 2]

4. Safety issues

 

Two very serious incidents involved a Saudi Arabian B747-300 (wet-leased from Air Atlanta) that caught fire in Bangladesh (it subsequently written off due damage beyond repair) and another Saudi Arabian B777 which suffered extremely expensive damages to both engines.

 

Yet, not many personnel have been informed about the real cause of these expensive and potentially fatal incidents and preventive measures being taken to avoid similar incidences.

How does these incidents relate to MH?

[Alif A. F. 0]

How does these incidents relate to MH?

 

maintenance by MAS?

[Tony 1]

*snip*

 

They tend to trail AirAsia's business strategies (remember the advertisement colour scheme, ELF (Everyday Low Fares) etc?

 

*snip*

 

Thanks for the interesting read, KK.

Good to know I'm not the only one having the impression that MAS is going off the tangent!