MAS Q2 FY09 Results

[Sing Yew 1]

Looks like they've turned in a profit for Q2 thanks to fuel hedging gains.

Operating loss of RM 421 mil though.

 

From The Edge Daily:

 

 

MAS posts RM875.5m net profit in 2Q

 

KUALA LUMPUR: MALAYSIAN AIRLINE SYSTEM BHD [ MAS 3.100 -0.010 (-0.322%) ] (MAS) posted net profit of RM875.51 million in the second quarter ended June 30, due to a RM1.34 billion fuel hedge gain.

 

MAS announced on Aug 6 the gains were due to a reversal of the hedging losses of RM640 million in the first quarter.

 

The group recorded an operating loss of RM420.8 million in 2Q compared with profit of RM62.0 million a year ago mainly due to lower operating revenue in line with the declining trend in global travel and cargo movements resulting from the current economic downturn.

 

Derivative gain/(loss) consisted of realised gain/(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 June 30, 2009 as compared to Jan 1, 2009.

 

MAS said the load factor in 2Q was 66%, an improvement from the 56% in 1Q.When compared with 1Q, the group recorded higher operating loss for the quarter of RM420.8 million compared to loss of RM137.9 million in previous quarter mainly due to a lower operating revenue in line with declining trend in global travel and cargo movements resulting from the current economic downturn.

 

However, the group recorded a profit after tax for the quarter of RM876.2 million from a loss of RM694.8 million in previous quarter after including derivative gain of RM1,340.5 million.

 

For the first half, net profit was higher at RM180.12 million compared with RM160.04 million a year ago. Revenue was RM5.3 billion versus RM7.52 billion.

 

The Economic Loss of the group for the quarter and period ended 30 June 2009 is RM882 million (2008: RM52 million loss) and RM1,785 million (2008: RM11 million loss) respectively.

 

The group recorded economic loss for the quarter and period ended June 30, 2009 after excluding derivative gain and certain non-operational items such as interest income and foreign exchange differences.

 

Edited August 6, 2009 by Sing Yew

[Cheng Long 0]

So does that mean they made the right decision to hedge some fuel?

[Sing Yew 1]

Well let's just say oil prices went back up again and now those fuel hedges they made back then are now rendered effective.

Doubt they'll now go around and sing praises of FRS 139 as they did previously by putting the blame on FRS 139 back in Q1.

 

Income Statement

Q2 FY 09 Q2 FY08

RM’000 RM’000

 

Operating revenue 2,495,444 3,657,738

Operating expenses (2,985,918) (3,712,083)

Other operating income 69,660 115,921

Gains on sale of properties - 453

(Loss)/Profit from operations (420,814) 62,029

 

Derivative gain 1,340,500 -

Finance costs (22,294) (6,864)

Share of results fr associated companies(677) 5,805

Profit before taxation 896,715 60,970

Taxation (20,457) (20,992)

Profit for the period 876,258 39,978

Attributable to:

Equity holders of the Company 875,513 39,978

Minority Interest 745 -

 

Profit for the period 876,258 39,978

 

Earnings per share attributable to equity holders of the Company

Basic (sen) 52.39 2.39

Diluted (sen) 49.68 2.25

 

Balance Sheet

Q2 FY 09 Q2 FY08

RM’000 RM’000

Non current assets

Aircraft, property, plant and equipment 2,850,447 2,464,823

Investment in associated companies 76,253 73,268

Other investments 55,210 64,946

Negotiable instruments of deposit 100,000 250,000

Prepaid Lease 198,438 219,854

Intangible assets 105,277 106,253

Other assets 243,132 213,092

Deferred tax assets 2,657 1,348

3,631,414 3,393,584

 

Current assets

Inventories 366,357 379,730

Trade and other receivables 1,644,246 1,931,539

Negotiable instruments of deposit 704,846 795,000

Cash and bank balances 2,133,076 3,571,743

4,848,525 6,678,012

Current liabilities

Trade and other payables 2,391,924 2,408,825

Provision 878,199 817,703

Short term borrowings 1,021,018 425,000

Short term borrowing (finance lease liability) 21,279 8,411

Provision for taxation 11,278 5,001

Derivative financial instruments 832,990 -

Sales in advance of carriage 1,446,514 1,222,410

6,603,202 4,887,350

Net current (liabilities)/assets (1,754,677) 1,790,662

1,876,737 5,184,246

 

Equity attributable to equity holders of the Company 419,806 4,185,698

Share capital - ordinary shares 1,671,062 1,671,002

Redeemable Convertible Preference Shares (RCPS) 58,076 58,076

Reserves

Share premium 4,007,629 4,007,446

Reserve 583,507 577,732

Accumulated losses (5,900,468) (2,128,558)

Minority interest 12,615 11,278

Total equity 432,421 4,196,976

 

SEGMENTAL INFORMATION

By Business Activities

 

Operating Operating

Revenue Profit/(Loss)

RM '000 RM '000

 

Airline operations 2,288,532 (362,640)

Cargo services 380,122 (48,343)

Catering services 3,365 1,209

Others 19,372 1,514

2,691,390 (408,260)

 

Eliminations (195,946) ( 12,554)

Total 2,495,444 (420,814)

 

Notes to the Financial Statements that may be of interest to some of you:

 

Note 1: REVIEW OF PERFORMANCE

 

The Group recorded an operating loss of RM420.8 million for the second quarter ended 30 June 2009 (Quarter ended 30

June 2008: RM62.0 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 profit after tax of RM876.2 million (Quarter ended 30 June 2008: RM40.0 million profit) after

including derivative gain of RM1,340.5 million.

 

 

 

 

 

Note 2: COMPARISON WITH PRECEDING QUARTER'S RESULTS

 

The Group recorded higher operating loss for the quarter of RM420.8 million compared to loss of RM137.9 million in

previous quarter mainly due to a lower operating revenue in line with declining trend in global travel and cargo movements

resulting from the current economic downturn. However, the Group recorded a profit after tax for the quarter of RM876.2

million from a loss of RM694.8 million in previous quarter after including derivative gain of RM1,340.5 million.

 

Note 4: CURRENT YEAR PROSPECTS

 

The International Air Transport Association forecasts that airlines would lose USD9 billion in 2009, which is nearly double

its March estimate despite the fall in the oil price. Demand is projected to fall sharply with passenger traffic expected to

contract by 8% and cargo demand expected to decline by 17%. The airline industry is being hard hit by the global credit

crisis, with the worst economic downturn since The Great Depression in the 1930s. This is further compounded by the

outbreak of the Influenza A (H1N1) virus. Whilst airlines have tried to reduce capacity in tandem with contracting demand,

the overcapacity has caused heavy fare discounting.

 

The outlook for the third quarter 2009 is expected to remain soft. While there are some signs of improving economic

climate, the airline industry is still faced with weak demand and downward pressure on yields. The operating environment

remains volatile with the H1N1 "pandemic" impacting travellers' confidence.

 

To overcome the soft demand and adverse competitive environment, MAS continues to fast track the implementation of its

Business Transformation Plan ("BTP 2"). The airline has aggressively pushed sales by offering various fare promotions

ranging from Everyday Low Fares, Get MAS Deals and the MAS Stimulus Package which offers 9 fare options covering all

classes of travel. In addition, it has launched innovative travel options such as Business First which allows customers to

be upgraded to First Class while paying business class fares. Customers who purchase Economy Plus fares will enjoy

business class travel privileges.

 

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).

 

Note 11: 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 31 July 2009, the Group has entered into various fuel hedging contracts for periods up to 31 December 2011 in lots

totalling 20,493,984 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.

 

As at 31 July 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 RM2,314 million.

 

The fixed interest rates relating to interest rate hedging contracts as at 15 July 2009 vary from 2.15% to 5.00% per annum.

As at 31 July 2009, the Group has entered into foreign currency hedging contracts and options for a total notional amount

of RM1,445 million for periods up to 15 July 2010.

Edited August 6, 2009 by Sing Yew

[Mushrif A 3]

The main headlines should be on the RM421m operating loss vs RM62m operating gain from the corresponding previous quarter.

 

Also, operating revenue is down by some RM1.2bn - yields must have suffered big time together with load factor. But op. costs only went down by some RM700m. Tough times.

[Mohd Azizul Ramli 2]

Wow, that was fast, don't you think so? (I recall SQ just announced their Q1 result last week - MH has finished with their Q2, maybe because it is a profit so it has to be announced as soon as possible, especially after the massive loss made in Q1).

 

Guess those responsible for the fuel hedging must be relieving a deep breath, thanks to the high jetfuel price.

[Jessnor Arif 1]

Wow, that was fast, don't you think so? (I recall SQ just announced their Q1 result last week - MH has finished with their Q2, maybe because it is a profit so it has to be announced as soon as possible, especially after the massive loss made in Q1).

 

Guess those responsible for the fuel hedging must be relieving a deep breath, thanks to the high jetfuel price.

 

Meaning MH got lucky...hoping they will not brag about it..and keep concentrating on operating profit..

 

not acctually fast.. it's about time i guess... Q2 ended in June..

Edited August 6, 2009 by Jessnor Arif

[Sing Yew 1]

Bear in mind that these are unaudited figures.

 

And IF oil prices crash again, there's a possibility that they may be reporting a fuel hedging loss in future quarters.

[M. Sofian H. 0]

superb MAS!!!!

[Mushrif A 3]

Load factor went up marginally, but this is artificial as yields dived by 16% yoy.

 

Still a tough outlook and difficult operating environment, with H1NI et al.

 

Jala said that there there would be at least 3 new destinations in the M-E...MH is a late comer as SQ, TG, CX have all announced their expansion in that region. SO, are we looking at AUH, RUH, KWI, BAH?

[flee 5]

I think the CEO is right and is focussing on the operating performance of the company. Fuel hedging profits are not generally within the control of management but operational matters are. So just take the hedging gains as a windfall and focus on getting the business and operations right.

[Azreen 0]

I think the CEO is right and is focussing on the operating performance of the company. Fuel hedging profits are not generally within the control of management but operational matters are. So just take the hedging gains as a windfall and focus on getting the business and operations right.

 

 

I would agree with u Flee on this one. I think under the current operating scenario, the results and explanations are expected. Cash position not too bad either.

 

Capt Nik : In the reporting, Charter services comes under "airline operation or Others"?

[KK Lee 5]

Hedging gain/loss is relative, current gain is 30th June over 31st March position. Understand MH forward contract was between US$100 to US$140 per barrel. Unless oil price is over US$100/140 per barrel, MH fuel cost is higher than spot price.

 

As a rule of thumb, hedging 50% of requirement over the next 6 to 12 months period is prudent else is gambling.

 

The major concern for MH is deteriorating yield. If the numbers is read correctly, IJ&co strategy and tactics to improve yield in the last few years has collapsed. Believe they need to rethink their strategy and business model to get out of another round vicious cost cutting, worsening yield, etc.

 

[BC Tam 2]

I think the CEO is right and is focussing on the operating performance of the company

In his actions, yes Datuk IJ should be focussing on the operating performance

In his dealings with the press this time round, better not focus in this direction, cause likely to get a hammering on operational losses

[Sing Yew 1]

An excerpt from the article in today's Star Biz:

 

In a filing to Bursa Malaysia yesterday, MAS said if it had not adopted the FRS 139, its operating revenue would have been RM2.49bil and a net loss of RM803.7mil for the second quarter.

 

MAS would have posted a net loss of RM1.59bil for the first six months ended June 30 on revenue of RM5.19bil if it had not adopted the FRS 139.

 

 

 

I guess they would now be thanking their lucky stars for having adopted FRS 139 early.

[Mohd Azizul Ramli 2]

Jala said that there there would be at least 3 new destinations in the M-E...MH is a late comer as SQ, TG, CX have all announced their expansion in that region. SO, are we looking at AUH, RUH, KWI, BAH?

That's always the case, isn't it? As mentioned before in another thread, in my opinion, it should be MH being a flag carrier of a Muslim majority country which happened to be a popular destination among the Arabs to spend their holidays, to take the lead in expanding in the Middle East, but sadly it is not the case. SQ has started RUH via DXB and KWI via AUH on top of a rumour to start DOH, along with JED, AUH and DXB. CX recently announced JED via DXB and TG is also rumoured to enter JED. D7 is even upped the ante a notch higher with their almost confirmed 'virtual hub' in AUH. And there is a saying that 'early bird gets the worm', so if MH is looking at RUH, AUH, KWI, DOH or BAH... well good luck I guess.

 

If the MH timetable is to be reliable, the carrier at the moment is operating an extra 2 weekly non stop flight into KWI with A330 until 13 August 2009 (flight MH 7090/7091).

 

I guess they would now be thanking their lucky stars for having adopted FRS 139 early.

It is exactly as you predicted earlier!

[Sing Yew 1]

That's always the case, isn't it? As mentioned before in another thread, in my opinion, it should be MH being a flag carrier of a Muslim majority country which happened to be a popular destination among the Arabs to spend their holidays, to take the lead in expanding in the Middle East, but sadly it is not the case. SQ has started RUH via DXB and KWI via AUH on top of a rumour to start DOH, along with JED, AUH and DXB. CX recently announced JED via DXB and TG is also rumoured to enter JED. D7 is even upped the ante a notch higher with their almost confirmed 'virtual hub' in AUH. And there is a saying that 'early bird gets the worm', so if MH is looking at RUH, AUH, KWI, DOH or BAH... well good luck I guess.

 

 

 

Well it's all about bringing the Malaysian Hospitality experience to more cities in the Middle East.

 

 

It is exactly as you predicted earlier!

 

Yup. It's what Idris Jala would call 'divine intervention', oil price rising thus rendering those hedges effective resulting in hedging gains. So if the trend (rising fuel prices) continues they can be hopeful that the hedging gains will cover for their operating losses. Needless to say, it's probably not a sustainable way of to be 'profitable'.

[BC Tam 2]

Needless to say, it's probably not a sustainable way of to be 'profitable'.

Remember foremost, discussion is on MH here

Sustainability and Profitability are joint attributes alien to the entity

[Alan B. 5]

From the Saturday Star.

 

Turbulence at Malaysia Airlines

 

A QUESTION OF BUSINESS WITH P. GUNASEGARAM

 

MALAYSIA Airlines says its net profit of RM876mil for the second quarter of this year is its highest ever quarterly profit. Yes, that's true but that's not the whole truth.

 

The whole truth is this: The accounting profit due to hedging gains masks Malaysia Airlines' serious operational problems caused by declining traffic and prices, and high costs. If it does not reverse this soon, it could well run out of cash not long from now.

 

Despite the net profit of RM876mil, Malaysia Airlines had an operating loss of RM420mil for the same period, after taking out a gain of a massive RM1.34bil from a partial reversal of provisions of nearly RM4bil for derivative losses.

 

How's that possible? How could accounting net profit be so good but the actual financial position and outlook for the company be so dire? Here's how.

 

Malaysia Airlines adopted Financial Reporting Standard 139 (FRS 139) from the beginning of this year. Effectively, this standard requires hedging positions to be marked to market value and the resulting loss or gain to be taken into the books.

 

On first adoption of this, Malaysia Airlines had huge losses of RM3.95bil, which were taken straight into the balance sheet – not via the profit and loss account. These losses are not actually realised but represent the losses if oil prices remained at the level they were at Jan 1, 2009.

 

For the first quarter of the year to March 31, 2009, Malaysia Airlines, as oil prices continued to decline, made huge hedging losses of RM567mil, pushing net losses to about RM695mil. Why, when oil prices are declining, should Malaysia Airlines lose in terms of hedging? That's because Malaysia Airlines had hedged at prices believed to be roughly equivalent to around US$100 a barrel for oil.

 

While oil prices declined (to as low as US$30 a barrel), the losses from its derivative contracts increased as they are marked to lower fair values. That means it effectively continues to pay high prices because of the hedges which basically capped prices of oil but did not provide for benefits to flow if prices fell instead.

 

On hindsight that was a bad move because oil prices declined. But Malaysia Airlines practised what it called competitive hedging which means it did what most other airlines did when it came to hedging – a follow-the-leaders policy that has cost it dearly.

 

Why does it benefit when oil prices are rising? That's because it has already taken a hit for when the price was low – remember the RM3.95bil charge against the balance sheet for derivative losses. That charge put it in negative territory in terms of accounting equity or shareholders' funds even though it had cash of close to RM4.62bil then (Dec 31, 2008).

 

Because of this charge, any rise in the oil price towards US$100 a barrel enables recovery in proportion to the increase in oil price, and if the price goes up to US$100 or more a barrel it will enable the recovery of most of the RM3.95bil provision.

 

But here's the important point to remember: Malaysia Airlines' current profit and more are coming entirely out of the provisions for hedging losses it made – if there had been no provision, there would have been no profit.

 

And here is where the accounting standard fails in painting a true picture to the public.

 

The previous one-time charge was taken through the balance sheet. The standard, however, allows any subsequent gain in an accounting period to be taken through the profit and loss account, misleadingly inflating reported profit.

 

It would have been better if the gain had gone straight to the balance sheet via an adjustment to the value of the derivative contracts, leaving the profit unchanged. But such is accounting policy at times.

 

What would be a fairer and more accurate reflection of profit? It can be argued that this would be if all hedging losses/gains are allocated and expensed to the period in which they were realised. In other words, if actual incurred costs were used.

 

This would be if FRS 139 had not been introduced. Then, Malaysia Airlines would have reported a loss of RM803mil for the latest quarter and a loss of RM1.6bil for the first half of the year, according to figures disclosed by the airline.

 

That looks like a much fairer reflection of the actual predicament that it faces.

 

When accounting seems dubious in terms of painting the true picture, it always pays to look at the cash position.

 

For the first half of this year, figures show that operations drained nearly RM1.5bil in cash, almost equivalent to the loss if FRS139 had not been used. That means in a year, the airline could be out of cash if it does not start reversing the situation.

 

As at Dec 31, 2008, the airline had RM4.62bil in cash, reducing by a huge RM850mil to RM3.77bil as at March 31, 2009 and by a further RM830mil to RM2.94bil as at end-June 2009. That's a rapid rate of cash depletion of almost RM1.7bil in a mere six months.

 

There's still a lot of cash and it gives substantial cushion for the airline to weather the downturn but only if it can turn around into operational profit and start generating cash flow once again. At the moment, the airline is in the grip of a potentially lethal pincer attack – its high fuel expenditure caused by hedging that went wrong and severe declines in revenue caused by both falling prices and reduced demand.

 

That's a terrible place to be and the public would have appreciated a straight address by the airline on these pressing issues instead of the emphasis on the record reported but misleading profits. How Malaysia Airlines is going to generate cash is the question to answer. By glossing over the whole truth (its media release never so much as mentioned an operating loss of RM420mil for the second quarter of the year or highlighted the drain on cash) and choosing to focus on record quarterly accounting profits, Malaysia Airlines does a disservice.

 

This is not only to its shareholders, mainly the Malaysian Government, but also its customers and the Malaysian public, which indirectly owns most of the company, all of whom deserve a clearer explanation of its financial situation and future plans.

 

l Managing editor P. Gunasegaram thinks that sometimes accounting is an ass, much like law is more often.

 

[flee 5]

MAS results disappointing despite Q2 profit, say analysts

 

PETALING JAYA: Malaysia Airlines (MAS) failed to impress analysts despite posting a stellar performance for the second quarter ended June 30.

 

MAS reported a net profit of RM876mil, or 52.39 sen earnings per share, aided by a RM1.34bil derivative gains on fuel hedging. Revenue for the quarter stood at RM2.56bil.

 

It recorded an operating loss of RM420.8mil mainly due to lower operating revenue, which is in line with the declining trend in global travel and cargo movements.

 

OSK Research analyst Ng Sem Guan said despite the huge jump in net profit, the core numbers were a “disappointment”.

 

He said the RM1.34bil in derivative gains and strong comeback in domestic passenger numbers suggested that the worst may be over for MAS.

 

“Nonetheless, we are disappointed with the weaker second quarter and are concerned over the protracted downturn and increasing death toll reported among Influenza A(H1N1) cases, which may prolong the airline’s recovery,” Ng said, adding that OSK maintained its “sell” recommendation on MAS.

 

MAS’ core net loss of RM465mil in the quarter to June 30 was a lot worse than OSK’s and consensus estimates, mainly due to a 20.7% drop in overall yield per revenue passenger kilometre to 23.4 sen on intensified price undercutting, he said.

 

“A protracted downturn in the global economy may also further pressure yields, given the substantial fare discounts being offered by airlines,” Ng said.

 

The national carrier also recorded higher non-fuel expenditure on new leases of the 737-800 in 2009, engine maintenance costs for the B-777 and aggressive advertising expenditure.

 

Ng said MAS’ derivative risk was protected to a certain degree as the carrier had selectively bought options, which would reduce the downside exposure of its existing fuel hedges.

 

For the first quarter ended March 31, MAS reported a net loss of RM695mil that included a derivative loss of RM557mil following the early adoption of the Financial Reporting Standard 139.

 

HwangDBS Vickers Research said the core net loss was mainly due to RM350mil realised derivative expenditure or losses, lower load factor and yield. The RM350mil comprised RM233.7mil derivative losses and RM116.4mil premium paid on derivatives.

 

HwangDBS maintained its fully-valued rating on MAS and cut the forecast financial year ending Dec 31 (FY09) earnings to RM2.2bil from RM1.3bil projected earlier to account for the higher-than-expected realised derivative expenditure losses.

 

“There could be more downside risks to FY09 earnings if MAS continues to report derivative expenditure or hedging losses as details of the hedging instruments and not available,” HwangDBS said.

 

AmResearch upgraded MAS to “sell” from hold. It said the airline traffic contraction had moderated significantly.

 

Kenanga Research said after excluding the RM1.34bil derivative gains, MAS registered a net loss of RM803.7mil in the second quarter and net loss of RM1.6bil for the first half.

 

It said the derivative gain was a relief for the balance sheet with shareholders’ funds turning positive thus alleviating the company’s PN17 status.

 

“The pro-forma net loss accounted for 69% of our FY09 forecast net loss,” Kenanga said.

 

“We are revising our earnings estimates up slightly by 9.6% and 8.3% for FY09 and FY10 respectively, reflecting slightly higher international passenger load factor,” it added.

 

Source: http://biz.thestar.com.my/news/story.asp?file=/2009/8/8/business/4480523&sec=business

Edited August 8, 2009 by flee

[Sing Yew 1]

From the horse's mouth.

 

StarBiz 15th August 2009

 

 

MAS: Adoption of FRS139 pushes agenda for transparency

 

 

MALAYSIA Airlines made a conscious decision to be an early adopter of the Financial Reporting Standard 139 (FRS 139) beginning FY09, and when we announced this in May 2009, we highlighted that we wanted to ensure we were aligned to how other full service carriers report their results and to ensure transparency.

 

Due to the unprecedented collapse in oil prices after reaching a historical high in July 2008, most airlines were hit by significant mark-to-market (MTM) loss positions on their fuel hedging portfolio.

 

Obviously, we at MAS were not spared as we practise competitive hedging and the early adoption of FRS139 enabled us to be transparent about our MTM position. Prior to FY09, there was no urgency to adopt FRS139 as our MTM position was not significant.

 

In addition, FRS 139 (or its equivalent) has been adopted in most countries. Most Asia-Pacific airlines (Singapore Airlines, Cathay Pacific and Qantas) are on the IAS 39 regime and US and European airlines are already on IAS 39/FAS 133.

 

Some international investors and analysts, in the past, had expressed a desire for us to state our MTM gains or losses to facilitate comparability of our results with our peers.

 

With the adoption of the FRS139, the MTM derivative position is relevant and derivatives are measured by their fair value at the end of each reporting date.

 

Any gains or losses will now be featured in the profit and loss account (P&L) and the swing between the two will depend on the valuation of unexpired derivative contracts which are highlighted in the balance sheet.

 

In the case of MAS, the hedging portfolio and MTM position comprise largely fuel hedging contracts which have maturity dates going on until Dec 31, 2011. Oil prices had been highly volatile over the last year and jet fuel price had moved from a high of US$175/barrel last year to a low of US$46/barrel this year.

 

Due to the oil price volatility, we announced net losses of RM695mil which included RM557mil in derivative losses in our Q109 results. We also reported an adjustment to our opening reserves of RM3.8bil to our balance sheet, being largely unrealised MTM for fuel hedging.

 

We also highlighted that there could be a potential fuel hedging gain should oil price continue to trend higher than Q109.

 

As the oil price forward curve was higher than March 31, 2009, we made a RM1.3bil gain in Q209 which enabled us to report a record net profit of RM876mil in the second quarter. We understand that the swing between net losses of RM695mil in Q109 and record net profit of RM876mil in Q209 can be disconcerting to the marketplace.

 

Therefore, we have segregated the operating profit and showed a specific line on derivative loss and gain in our P&L statement. There is also a specific line in our cash flow on fuel hedging settlements.

 

In our Q209 results announcement filed in Bursa, under part B review of performance, we first announced that MAS recorded an operating loss, followed by derivative gains and net profit.

 

We made a record net profit of RM876mil, and an operational loss of RM421mil.

 

During our result briefings, we walked the media and analysts through our P&L in terms of revenue, expenditure, operating loss and net profit. We had robust discussions on yield, seat factors, operational losses and ways to increase revenue, operating cash flow and fuel hedging.

 

We will continue to be transparent and assist users of our financial statements to understand our business performance. It is important for the market to understand how to interpret these financial results to provide an objective and fair assessment of a company’s performance as corporate Malaysia will have to fully comply with FRS139 come Jan 1, 2010.

 

Competitive fuel hedging policy

 

An insurance policy is meant to protect the buyer. Should nothing untoward happen to the policyholder during the course of the period insured, we doubt the buyer would lament his/her lack of foresight in purchasing the policy. Similarly, airlines hedge against fuel as it protects against the volatility of fuel prices. This is prudent financial practice as fuel is our single largest cost item.

 

As such, although jet fuel price has dropped, hedges cannot be viewed as a mistake simply because losses were incurred. Oil price remains volatile and has tracked upwards. In fact, when jet fuel price was at its height of US$175/barrel last year, and expected to go up to US$200/barrel, many stakeholders took the view that we did not hedge enough.

 

And because airlines typically know the core network they will run 2-3 years in advance, the need to hedge against the unpredictability of fuel price is critical.

 

Our policy of competitive hedging is a sound one. The rationale behind a competitive hedging policy is to attempt to remove future fuel price uncertainty. This means MAS and our peers will all be equally affected by the fuel price, whether it goes up or down.

 

By doing so, we remove fuel price as a factor in our pricing and competitive decision. If our peers have roughly the same fuel cost as ours, we would have to factor the same fuel cost into the ticket prices. With fuel cost taken care off, we can all compete on winning our customers with our underlying fares, products and services.

 

Cash position as of 1H09

 

There were some concerns that we are depleting our cash reserves rapidly. As at Dec 31, 2008, we had RM4.62bil in cash. By end-June 2009, our cash position was RM2.94bil. The RM1.7bil difference was not due solely to losses. We spent on capital expenditure, restructured our hedging portfolio and paid out matured hedging liabilities.

 

We paid some RM550mil on capital expenditure, largely for five ATR72 aircraft, progressive payments for our B737-800 order and other routine investments. We have also spent some RM500mil to restructure our hedging portfolio and mitigate the impact of spot oil prices coming down.

 

Mitigating challenges

 

We are facing the worst crisis in our commercial flight history. Many airlines are registering losses at the operational level. This includes regional airlines like Singapore Airlines and Cathay Pacific. We are not immune from this. Like all the other airlines, we are facing huge challenges.

 

We are doing everything we can to boost our revenue, conserve cash, and manage costs. We are on the right track in attracting passengers as our loads are up by more than 10% to 66% in Q209. Our forward booking loads are up.

 

We are aggressively pushing sales, and 15 campaigns for Malaysia and 30 for global markets have been lined up for the rest of the year. With passengers coming back, we are now working on increasing yield.

 

We expect the economy to recover next year, and are looking forward to take delivery of our new B737-800 in late 2010 to capture the expected growth. We are reviewing aircraft requirements according to supply and demand, and realigning our capacity to tap into the growth in demand.

 

We will increase our frequencies into key Asean capitals, South Asia, China and offer more flights to certain points in Australia. In the Middle East, we are looking at expanding our services.

 

Given all that are being done, we are hopeful of recovery with the upswing in the economy. We have confidence because the 20,000 employees in MAS have an enduring commitment to keep the Malaysian flag flying high.

 

Thank you Malaysia for supporting us.

 

Tengku Azmil Zahruddin

Executive Director and Chief Financial Officer

Malaysia Airlines