Published June 12, 2009

MAS's Q1 loss expected to top RM2 billion

Wrong bets on fuel prices staying above US$100 a barrel could prove costly

By PAULINE NG
IN KUALA LUMPUR

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MALAYSIA Airlines (MAS) is expected to post a loss, which could exceed RM2 billion (S$828 million), on fuel hedges gone awry for its first quarter to end March.

Turning point: MAS posted RM244m profit in its last fiscal year and is set to announce its Q1 results today

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 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, 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, Mr Jala 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.