More On MAS Oil Hedging Losses

Posted on Saturday Comments On MAS Oil Hedging Losses.

Couple of interesting comments.

• hhc1977 said...
  
  1)Competition is always good and i believe even though Msia might not have the market to support 2 domestic airlines (neither do Spore), we should not just let MAS to monopolize the market.
  2)Since they are both private entity (at least run as one), the onus to making profit lie solely on the boards to see this happen.
  3)The only problem is whatever loss they incur, gov should not bail out this MAS if thing go wrong. (Ego problem again..)
  4)I am truly amazed whether MAS is an airline or an oil trader considering the "loss" at its hedging (suuportive function) operation.
  5)Even though oil price is now higher than the level at March 31, but do shareholder in MAS really wants MAS to be an oil trader (if oil price held, the next Q result MAS might be cheered as good GLC turnaround and all the hooha this time will be history again).
  6)As for me, i will only invest MAS as an AIRLINE which does what an airline should do.
  7)Can we do a comparison between MAS, cathay and SIA on their respective hedging activities?

Here's another

• Maverick said...
  
  Yes, agree, they did much too many contracts. If oil goes down again (I am bullish on oil, but it is certainly possibly it can go down, there are still lots and lots of big items in the global economy that can go terribly wrong), then the losses of MAS will be very real. Losing billions on "hedging" when profits are in the hundreds of millions doesnt make sense to me at all.
  
  The other thing I dont like is how they try to hide things. First of all I dont understand the delay in the results. Secondly they should have done mark-to-market more early (best was immediately after buying the contracts). Thirdly, what they did now is book a decent loss in this quarter (actually less than analysts expected: 1 billion was predicted) and the other hedging losses are hidden in restating the old accounts. That way it doesnt look too bad.
  
  When will companies learn, have seen so many companies burn their fingers on these contracts in a big way? The only ones I have ever seen making some money on it are well managed plantation companies, they sometimes have the foresight of selling (part of) their future production when they expect that the current price is high. Even they cant have it 100% right, but at least they seem to have it more often right than wrong. Other companies I only see making small profits, and then a huge loss erasing all profits so far.

On Business Times: MAS fuel-hedging strategy gets mixed reviews

• ANALYSTS are mixed about whether Malaysia Airlines (MAS) (3786) is doing the right thing in its fuel contracts, but they agree that the outlook for the national carrier looks sombre.
  
  "I do not find the mark-to-market losses it posted all that worrying because, it is something that most companies will have to go through come 2010, and MAS did take some measures to mitigate its affects," Maybank Investment Bank senior analyst Khair Mirza told Business Times.
  
  "What I am more worried about is that the carrier does not seem to be reacting fast enough to passengers' needs. They are not doing enough.
  
  "With the second quarter being traditionally its weakest quarter, and the H1N1 flu gathering more intensity, it is hard to imagine the carrier making a profit (in the second quarter of 2009)," he added.
  Khair estimated that during the January-March period, MAS had lost 30 per cent of its passengers to its competitors.
  
  On Friday, MAS reported a net loss of RM695 million in its first quarter ended March 31 2009, versus a year-ago net profit, largely due to its fuel hedging contracts.
  
  Notwithstanding the RM640 million mark-to-market fuel hedging losses, the carrier posted RM138 million in operating loss.
  
  It also said it had spent some RM400 million to restructure its hedging contracts into 2011.
  
  Standard & Poor's Asian Equity Research analyst Shukor Yusof said MAS' mark-to-market losses is an indication of what to expect from the carrier in the coming months.
  
  For MAS to be a trend setter, he believes that it should take a more proactive approach in its fuel hedging strategies.
  
  "One of MAS' main problems is that it adopts a herd mentality when it comes to fuel hedges. There is no real vision and MAS is obviously afraid to take risks," Shukor said.
  
  The airline could still make a profit in the second quarter, though, albeit not an operational one, again due to the airline's new accounting standard.
  
  This is because just as how the airline saw a paper loss of RM640 million in the first quarter, it could see a paper gain of RM1.1 billion on fuel hedging if oil prices average US$66 a barrel in the second quarter.
  
  Meanwhile, in a reply to a local blog posting on Rocky's Bru on Saturday, MAS executive director and chief financial officer Tengku Azmil Zahruddin said any business in which its major cost item doubles to US$180 per barrel in six months, only to fall to US$40 per barrel in the next six months, must take steps to protect itself against such volatility.
  
  He added that because airlines typically sell seats six months into the future and sometimes even up to 340 days in advance, the need to hedge against the unpredictability of fuel price is critical.
  
  "As with other airlines which hedge, MAS only enters into long fuel hedges, where we are buying fuel, and do not speculate by selling short in the fuel market, as may be the case with certain low-cost carriers," Tengku Azmil said.