This article by Tengku Dato’ Azmil Zahruddin, Managing Director/CEO, Malaysia Airlines was featured in The Star on 15 August 2009
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 practice competitive hedging and the early adoption of FRS 139 enabled us to be transparent about our MTM position. Prior to FY09, there was no urgency to adopt FRSI39 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 lAS 39 regime and US and European airlines are already on lAS 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 unrealized 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 an RMI.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 RM421 mil.
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 RMI.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 live 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 is 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! |