MAS's Q1 loss expected to top RM2billion

[Alan B. 5]

Looks like MH is about to announce bad news. Below is a report from Business Times Singapore.

 

KUALA LUMPUR, June 12 — Malaysia Airlines (MAS) is expected to post a loss, which could exceed RM2 billion, on fuel hedges gone awry for its first quarter to end March. RHB Research estimated the national carrier's loss in the region of RM1.7 billion, a projection based on an MAS decision to adopt Financial Reporting Standard 139, requiring the company to recognise mark-to-market losses on its hedges. Industry executives, however, expect the loss to exceed RM2 billion.

 

When jet fuel was trading at well over US$100 (RM350) per barrel last year, MAS had bet on prices remaining high at around US$100 — but was caught out when the global financial crisis hit last year. The sharp pull-back in business activities quickly dragged down the price of crude oil to less than half at its lowest.

 

Although crude oil prices have since risen to over US$70 per barrel — the airline's previous hedge of 64 per cent of its fuel needs for FY2009 at US$100 per barrel and 40 per cent of FY2010 at US$95 — the hedges have proven costly.

 

Any billion-ringgit loss would be a big blow to the airline and its managing director, Datuk Seri Idris Jala. His stewardship, since 2006, had helped turn MAS around in less than a year after it shocked markets with a RM1.7 billion loss in 2005.

 

Earlier this year, Idris said that the airline had started restructuring some of its hedge options, but noted: "It does not make sense for you to put in a lot of money to unwind and cause yourself to fall into a deeper hole."

 

MAS's misfortune illustrates the dilemma confronting airlines generally, which, in the face of extreme economic volatility, need to get their hedges right since jet fuel accounts for a huge chunk of their operating cost. In the case of MAS, it makes up nearly a third of the costs, and for Malaysia's other carrier, AirAsia, close to half.

 

The thin line between hit and miss is further underscored by the fluctuating fortunes of both carriers.

 

AirAsia reported a RM472 million loss in its last fiscal year to end-December after getting hit on its hedge and decided to take a one-off charge of RM426 million in the last quarter to get out of hedging completely. Then, it had betted on oil prices coming down but instead they soared higher.

 

AirAsia has since decided it would rather pay spot market rates for its fuel needs until there is greater stability in crude prices. Bucking the general trend in the industry, the airline posted a RM203 million profit in the first quarter.

 

MAS posted a profit of slightly over RM244 million in its last fiscal year and is set to announce its Q1 results today.

 

But the impact of its fuel hedges aside, analysts are projecting a tough year ahead for the airline in the face of shrinking demand, exacerbated by health scares such as the influenza caused by H1N1 virus. — Business Times Singapore

[Mohd Suhaimi Fariz 2]

Hedged at the wrong time...

[Sharil Abdul Rahman 0]

Its human error unfortunately - hedging at the wrong time in economics term.

 

Also, is it more profitable to follow air-asia's on-the-spot pricing or hedging?

[flee 5]

Frankly I have a dim view of the so called "analysts". Last year, they criticised AirAsia for not hedging fuel and marked down their share price because of that. Being a publicly listed company, they had to kow tow to the analysts. AirAsia then started to hedge fuel in the second half of the year, when fuel prices peaked. That was why they were badly hit.

 

Malaysia Airlines hedged fuel right from the beginning and they hedged a higher proportion of it too, hence the big big loss. Looks like the oil speculators are the biggest gainers - and they only trade pieces of paper in the comfort of their plush offices...

Edited June 12, 2009 by flee

[Izanee 0]

no wonder MH stocks have been suspended for trading today!

[Alif A. F. 0]

...almost 2 billion?! that's not even an annual loss...

[Sing Yew 1]

Looks like MH is about to announce bad news. Below is a report from Business Times Singapore.

 

From MAS' Investor Relations' site:

 

MAS wishes to announce that Bursa Malaysia Securities Berhad ("Bursa Malaysia") has approved the Company's request for a suspension in the trading of its shares for one (1) market day on 12 June 2009. The request for suspension is made under paragraph 3.1( of Practice Note 2/2001 of the Listing Requirements of Bursa Malaysia as MAS is making an announcement on 12 June 2009 of its 1st Quarterly Results 2009 based on the early adoption of FRS 139.

 

This announcement is dated 11 June 2009.

 

FRS 139 will render their fuel hedges as ineffective hedges. So won't be surprised if massive losses are posted.

 

Hedged at the wrong time...

 

Well back when the hedges were entered into, it wasn't predicted that fuel prices will fall to such significant extent. Numerous airlines are affected as well.

 

[Sing Yew 1]

Income Statement Figures Q1 FY09 (Unaudited)

 

Figures in RM'000

 

Operating revenue 2,701,031

Operating expenses (2,877,507)

Other operating income 38,559

(Loss)/Profit from operations (137,917)

Derivative loss (557,001)

Finance costs (17,440)

Share of results from associated companies 5,965

(Loss)/Profit before taxation (706,393)

Taxation 11,587

(Loss)/Profit for the period (694,806)

Attributable to:

Equity holders of the Company (695,398)

Minority Interest 592

(Loss)/Profit for the period (694,806)

 

(Loss)/Earnings per share attributable to equity holders of the Company:

Basic (sen) (41.61)

Diluted (sen) (41.61)

 

 

Income Statement Figures Q1 FY08 (For comparative purposes)

 

Figures in RM'000

 

Operating revenue 3,661,147

Operating expenses (3,617,486)

Other operating income 87,293

Gains on sale of properties 1,944

(Loss)/Profit from operations 132,898

Finance costs (3,565)

Share of results from associated companies 4,956

(Loss)/Profit before taxation 134,289

Taxation (13,759)

(Loss)/Profit for the period 120,530

Attributable to:

Equity holders of the Company 120,061

Minority Interest 469

(Loss)/Profit for the period 120,530

 

(Loss)/Earnings per share attributable to equity holders of the Company:

Basic (sen) 7.19

Diluted (sen) 6.77

Edited June 12, 2009 by Sing Yew

[Cheng Long 0]

MAS posted a loss of RM695.. In a sense they were "going beyond expectation". The loss did not top RM2 billion as some analysts predicted. Hmm.. They sure have very low expectation for MAS.

[Simon 3]

loss more than make......

[Alan B. 5]

THE EDGE

KUALA LUMPUR: Malaysian Airline System Bhd posted net loss of RM694.8 million in the first quarter ended March 31, 2009 compared with a profit of RM46.6 million a year ago. It said on June 12 the net loss included derivative loss of RM557.0 million with the early adoption of financial reporting standards (FRS 139).

 

The group recorded an operating loss for the quarter of RM137.9 million from a profit of RM66.3 million mainly due to a lower operating revenue in line with declining trend in global travel and cargo movements resulting from the current economic downturn.

 

Explaining the derivative loss, MAS said it consisted of realised loss on settlement of hedging contracts during the quarter and fair value changes due to movement in mark-to-market (MTM) position on outstanding hedging contracts at March 31, 2009 as compared to Jan 1, 2009.

 

The loss of RM557 million comprised of loss from fuel hedging contracts totaling RM640.2 million, gain from foreign currency hedging contracts of RM80.5 million and also gain from interest rate hedging contracts of RM2.7 million.

 

On the current year prospects, it said the International Air Transport Association had revised its forecast that the airline industry will lose more than US$9.0 billion from a loss of US$4.7 billion previously despite the fall in the oil price.

 

MAS said demand was projected to fall sharply with passenger traffic expected to contract by 8% and cargo demand expected to decline by 17%. It also added the airline industry is being hard hit by the global credit crisis, with the worst economic downturn since depression in the 1930s.

 

This is further compounded by the threat of outbreak of the Influenza A (H1N1) virus. Whilst airlines have tried to reduce capacity in tandem with contracting demand, the continued delivery of new aircraft also has caused heavy fare discounting.

 

“For the second quarter of 2009, demand is expected to remain soft, being the low travel season period,” it said.

 

“Forward booking trends especially for the long haul UK/Europe, Australia and US routes is expected to stabilise into the second half of the year with the various sales incentives planned for the year ahead,” it added.

 

However, MAS said the outlook remains challenging as yield pressures continue to mount as airlines proceed to reduce fares and fuel surcharges to encourage consumers to travel.

 

MAS said to overcome the soft demand and adverse competitive environment, MAS was continuing to fast track the implementation of its Business Transformation Plan (BTP 2) which was based on dynamic pricing, network optimisation, cost management and innovation.

 

At the same time, the management plans to cut costs between RM700 million to RM1 billion in 2009, without compromising on safety or quality. “For 2009, the group's targets are: RM499 million loss - RM50 million net income (on target), RM51 million - RM500 million (exceeding) and RM501 million - RM 1 billion (outstanding),” it said.

[Sing Yew 1]

Excerpts from the Notes Disclosure for those who are interested:

 

Review of Performance:

 

The Group recorded an operating loss of RM137.9 million for the first quarter ended 31 March 2009 (Quarter ended 31

March 2008: RM132.9 million profit) mainly due to lower operating revenue in line with the declining trend in global travel

and cargo movements resulting from the current economic downturn.

 

The Group recorded a loss after tax of RM694.8 million (Quarter ended 31 March 2008: RM120.5 million profit) after

including derivative loss of RM557.0 million with the early adoption of FRS 139.

 

Derivative Financial Instruments

 

Prior to 1 January 2009, derivatives were not recognised in the financial statements. Under FRS 139, derivatives are required to be initially recognised at fair value on the date the derivative contract is entered into and subsequently at fair value at each balance sheet date. Derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative. Any gains or losses arising from changes in fair value on derivatives that do not qualify for hedge accounting are recognised in the income statement.

 

However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of item being hedged as follows:

 

Cash flow hedge

 

The effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while an ineffective

portion is recognised immediately in the income statement. Amounts taken to equity are transferred to the income

statement when the hedged transaction affects profit or loss, such as when the hedged financial expense is recognised or

when a forecast sale occurs. When the hedged item is the cost of a non-financial asset or non-financial liability, the

amounts taken to equity are transferred to the initial carrying amount of non-financial asset or liability.

If the forecast transaction or firm commitment is no longer expected to occur, amounts previously recognised in equity are

transferred to the income statement. If the hedging instrument expires or is sold, terminated or exercised without

replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognised in equity remain in

equity until the forecast transaction or firm commitment occurs.

 

DERIVATIVE LOSS

 

Derivative loss consists of realised loss on settlement of hedging contracts during the quarter and fair value changes due

to movement in mark-to-market (MTM) position on outstanding hedging contracts at 31 March 2009 as compared to 1

January 2009 which mainly comprise of the following:

 

(Figures in RM' Mil)

 

Loss from Fuel Hedging Contracts (640.2)

Gain from Foreign Currency Hedging Contracts 80.5

Gain from Interest Rate Hedging Contracts 2.7

Total: (557.0)

 

 

 

THE EDGE

 

Looks like The Edge has reported some commentaries from the Disclosure Notes won't post those already reported over here.

 

SEGMENTAL INFORMATION

 

Operating revenue (RM '000)

 

Airline operations 2,513,410

Cargo services 359,235

Catering services 2,691

Other 20,722

Eliminations (195,027)

Total 2,701,031

 

Operating profit/(loss) (RM '000)

 

Airline operations ( 42,540)

Cargo services (84,956)

Catering services 617

Others 879

Eliminations (11,917)

Total (137,917)

 

FINANCIAL INSTRUMENTS

 

As a result of early adoption of FRS 139: Financial Instruments, Recognition and Measurement, fuel hedging contracts,

interest rate hedging and foreign currency hedging contracts which were previously classified as off balance sheet

financial instruments have now been recognised in the balance sheet as derivative financial instruments.

 

As at 8 June 2009, the Group has entered into various fuel hedging contracts for periods up to 31 December 2011 in lots

totalling 21,918,984 barrels. 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.

QUIREMENTS UNDER PART A OF APPENDIX 9B (CONTINUED)

As at 8 June 2009 the Group has entered into various interest rate hedging contract transactions for periods up to 13

December 2016 for a total notional amount of RM2,293 million. The fixed interest rates relating to interest rate hedging contracts as at 8 June 2009 vary from 2.15% to 5.00% per annum.

 

As at 8 June 2009, the Group has entered into foreign currency hedging contracts and options amounting to RM2,075

million for periods up to 4 May 2010.

 

[Mohd Azizul Ramli 2]

Ouch, there goes the record of a straight quarterly profit for Dato Seri Idris Jala! Probably too much emphasized on other smaller cost centers that he overlooked the people in charged of the fuel hedging matter.

 

Just to share something of similar capacity, during the early post merger days of Sime Darby, Golden Hope Plantations and Guthrie (all of which were GLCs like MH), there was a case of a bad future trade of oil palm derivatives (or something along that line) which involved the former CFO/Director of Finance of GHope and also the former GHope's Head of Communication Department, which caused a loss of MYR 120 million to the Sime Darby Group. Both the mentioned executives were investigated and were fired upon the conclusion of the case.

 

Now, I would be surprised if someone (or several people) is/are not being fired because of this bad fuel hedging decision making, as it involved a larger amount of losses. I am sure the folks at Khazanah will do something about it.

 

I found the news article about the mentioned case at Sime Darby.

 

June 10, 2008 22:00 GMT+8

Sime Darby Fires Finance Chief on $37 Million Crude Palm Oil Futures Loss

 

June 10 (Bloomberg) — Sime Darby Bhd., Malaysia’s largest publicly traded palm oil producer, fired Chief Financial Officer Razidan Ghazalli and a second executive after a 120 million- ringgit ($37 million) trading loss at a unit. A refining division lost the money on futures between October 2006 and August 2007, Sime Darby said in a statement today. Sime Darby bought the unit, Golden Jomalina Food Industries, in November 2007 as part of a merger with two other plantation groups, the Kuala Lumpur-based company said.

 

“The persons concerned had failed to discharge their functions to the standard of care that was reasonably expected of them,” Sime Darby said in its statement. The two were informed yesterday, the company said.

 

Wrong-way bets on securities brought down Barings Plc and triggered a $550 million loss at China Aviation Oil (Singapore) Corp. in 2004. Sime Darby said today it has made “appropriate” provisions for the loss and promised future profitability won’t be harmed.

 

Brendan Pereira, a spokesman for Sime Darby, said he was unable to provide phone numbers or contact details for the two executives, and they no longer worked at Sime Darby. He declined to comment beyond the company’s statement.

 

Sime Darby, formed in 1910, merged with Golden Hope Plantations Bhd. and Kumpulan Guthrie Bhd. in November last year. The government-backed deal was designed to create a palm oil producer controlling about 8 percent of global output.

 

Razidan was director of finance at Golden Hope, which owned Golden Jomalina, when Sime Darby said the trading loss was incurred. Muhammad Mohan Kittu Abdullah, the second person fired for the losses, was general manager of Golden Jomalina at the time, Sime Darby said. He was dismissed as Sime Darby’s vice president of downstream and biofuel, according to the statement.

 

Forensic accountants investigated the trading loss and submitted a report this year, Sime Darby said. The company’s directors discussed the report on May 28, it said.

 

http://www.palmoilhq.com/PalmOilNews/sime-...l-futures-loss/

 

BE VERY SCARED!

Edited June 12, 2009 by Mohd Azizul Ramli

[KK Lee 5]

As at 8 June 2009, the Group has entered into various fuel hedging contracts for periods up to 31 December 2011 in lots

totalling 21,918,984 barrels.

 

 

Curious to learn, what scenario MH based to hedge fuel until 31 December 2011?

 

 

[jysim 0]

A start of a 'downward spiral' as Jala so meticulously warned back in 2005/6? I certainly hope not.

 

But once again, things are really not looking good for MH - while most agree that the environment is very challenging for all, MAS doesn't seem to be actively involved in preparing for a rebound or recovery from the economic crisis, which some say has started in Asia. No new aircraft orders has been made (postponed since an eternity ago), meaning once everybody starts flying again when the times are good, MH will be left with all the rattling planes and fuel-gauzing 744s. Compounded with the failure of entry into ANY SINGLE ALLIANCE (Skyteam wants Vietnam instead of MH), things definitely seems catastrophic.

 

With the current loss and passive attitude, a repeat of Alitalia is not long down the way I think...

[Sing Yew 1]

Curious to learn, what scenario MH based to hedge fuel until 31 December 2011?

 

 

It is something that I am equally curious to know myself.

 

[BC Tam 2]

Curious to learn, what scenario MH based to hedge fuel until 31 December 2011?

Rose tinted binoculars syndrome ?

 

Does MH still hold those hedge positions though ?

Or is this fuel hedge loss reflected in the accounts only for compliance with bean counters' rules ?

Say if six months down the road and oil price rocket northwards like not so long ago, will a fuel hedge profit be reported ?

 

And don't be too surprised if oil continues to vacillate like it has - by and large the same group of traders/speculators are still running the show I believe

[Cheng Long 0]

MAS adopted the FRS 139 early so there will be more transparency and people can compare MAS like-for-like with their competitors.. but so far little is mentioned about how they are faring against their competitors. Are they lagging behind badly or everyone is in some sort of trouble. I don't have any accounting background (beyond PMR), so I won't know. Perhaps someone can enlighten me.

[Sing Yew 1]

MAS adopted the FRS 139 early so there will be more transparency and people can compare MAS like-for-like with their competitors.. but so far little is mentioned about how they are faring against their competitors. Are they lagging behind badly or everyone is in some sort of trouble. I don't have any accounting background (beyond PMR), so I won't know. Perhaps someone can enlighten me.

 

FRS 139 comes into effect in Malaysia from 1 Janurary 2010 onwards. It is the domestic equivalent of the International Financial Reporting Standard's IAS 39 - Financial Instruments: Recognition and Measurement.

 

So in this case, MAS decided to make an early adoption. However, many other countries have been reporting in compliance to IAS 39 or their harmonised equivalents e.g Australia has an IAS 39 equivalent in the form of AASB 139. So for airlines from countries that are already reporting in accordance to IAS 39 or its local equivalents, you should technically be able to compare their fuel hedging profits/losses with MAS'. Air New Zealand comes to mind as I've had a quick look at their Notes Disclosure a couple of months ago and they too suffered fuel hedging losses as did Singapore Airlines and Cathay Pacific.

 

MAS' reporting should become even more transparent when they have to comply to FRS 7 (Financial Instruments: Disclosures) which also comes into effect 1 January 2010 in Malaysia. The Australian equivalent, AASB 7 came into effect 1 January 2007.

[KK Lee 5]

Say if six months down the road and oil price rocket northwards like not so long ago, will a fuel hedge profit be reported ?

 

Yes, they should.

 

Personally, I believe high oil (and commodity) price can’t be sustained else world economy will take ages to recover from the current recession.

 

 

[Alan B. 5]

When I watched TV3 and NTV7 news yesterday, I noticed interestingly that they decided to report only the operating loss of RM133million instead of the nett loss of RM694.8million.

[Sing Yew 1]

Rose tinted binoculars syndrome ?

 

Does MH still hold those hedge positions though ?

Or is this fuel hedge loss reflected in the accounts only for compliance with bean counters' rules ?

Say if six months down the road and oil price rocket northwards like not so long ago, will a fuel hedge profit be reported ?

 

And don't be too surprised if oil continues to vacillate like it has - by and large the same group of traders/speculators are still running the show I believe

 

BC, those hedging losses amounting to RM 640 mil (refer to my previous post on Derivative Losses figures) would have been realised upon settlement of the hedging contracts during the quarter. And thus these losses reflect the true picture of what happened and not merely to comply to FRS 139.

 

Given your scenario, say 6 months down the road, fuel prices spirals upwards and goes beyond USD 100 per barrel (as per their hedged price) then the remaining (i.e. hedging contracts that remains unsettled) fuel hedging contracts that MAS has on hand will then be reported as realised profits for those respective quarters.

 

As for now, those unsettled hedging contracts are being booked as a net unrealised marked-to-market loss on derivative financial instruments to the tune of RM 3,328 million. The net unrealised marked-to-market position is primarily due to these hedging contracts with maturities over a 3-year period up to 31 December 2011 as disclosed in their Notes Disclosure. These unrealised fuel hedging positions (marked-to-market) will thus fluctuate subject to the movement in the fuel forward curve as I've illustrated based on your scenario above. Hopefully I've not confused you.

 

The figures will definitely look friendlier to the eyes if they did not decide to adopt FRS 139 early. Group Equity Holder's fund as at 31 March 2009 would have been RM 3,396 mil (without FRS 139) instead of -RM 458 mil (with FRS 139).

 

That's just my take. Please correct me if I'm wrong.

 

 

 

[KK Lee 5]

 

Believe MH’s expensive ticket price and below expectation products in the last few years has alienated many regular travelers, travelling on MH is now perceived to be financially imprudent by private sector (holiday makers can book for cheap fare well in advance not business travelers) and MH is no longer the preferred airline for many PLC (except GLC) executives. Moving forward, MH may need to rethink its market positioning and strategy else MH will continue to lose market share and downsizing.

 

As fuel is hedged til December 2011, company profit is no longer under control for the next 11 quarters. Profit can swing from profit to loss or vice versa every quarter subject to market price. No matter how hard MH employees work, their bonus and effort can’t be assured or recognized.

 

As a responsibility to shareholders, employees and stakeholders, head must roll for those who responsible for fuel hedging.

 

 

[BC Tam 2]

Yes, they should.

..... hedging losses amounting to RM 640 mil (refer to my previous post on Derivative Losses figures) would have been realised upon settlement of the hedging contracts during the quarter. And thus these losses reflect the true picture of what happened and not merely to comply to FRS 139.

 

Thanks for those clarifications

 

So, as I understand it now :

1) fuel hedge losses = rm640M for period 01/01 to 31/03/2009 only

2) based on spot fuel price as at 31/03/2009 and assuming this remains constant, there will be a further loss of rm3,328M to be incurred over period 01/04/2009 to 31/12/2011, 11 quarters, or rm303M per quarter

3) this potential loss of rm3,328M has not been publicly announced but can be found if one knows where to look

Oh yikes !

 

Iirc, AK took the alternative approach and paid off their fuel hedge losses by unwinding their hedge positions, correct ? Meaning, there isn't this proverbial noose round their neck anymore ? Of course, also means AK will be smacked again if fuel price go upwards again (assuming they have not taken up new hedge positions since)

 

 

 

Curious to learn, what scenario MH based to hedge fuel until 31 December 2011?

Interest rate hedging contract transactions are for periods up to 13 December 2016 instead, 7 years 3 months

Will MH still be around as a viable concern by that time !

 

 

 

As a responsibility to shareholders, employees and stakeholders, head must roll for those who responsible for fuel hedging.

Get a grip on yourself man, this is MH, yes, THAT GLC

Even if things do roll, there will likely be some fat compensatory package accompanying, or long drawn out expensive legal wrangling in some 'correct, correct, correct' court of law

Now, what was that about 'responsibility' to ............

Edited June 14, 2009 by BC Tam

[KK Lee 5]

Get a grip on yourself man, this is MH, yes, THAT GLC

Even if things do roll, there will likely be some fat compensatory package accompanying, or long drawn out expensive legal wrangling in some 'correct, correct, correct' court of law

Now, what was that about 'responsibility' to ............

 

True, may be those responsible will become CFO or Finance Director. Oooops!