Monday, June 15, 2009

MAS 1st Quarter Loss: Poor hedging decisions?


Malaysia Airlines reported a loss of RM695 million for the first quarter 2009 and Tun Abdullah Ahmad Badawi’s first term as Adviser. Despite his first term, Tun Abdullah can’t absolved himself from being part and parcel of the massive loss created.

Pak Lah was the person responsible to choose the two Managing Directors - previously Dato Fuad and current Dato Seri Idris Jala - without proper and thorough background check.

This blogger personally heard a businessman-supporter of Pak Lah gloating in his claim that he recommended Idris's name to son Kamaluddin. Kamal had called to seek for a replacement MD for MAS. He recommended Idris simply because he knows Idris from his IT business without knowing his real competency and relevency of his skill set to MAS.

Pak Lah was not keeping abreast with the execution of the turnaround plan and the real financial status of the company. He gave the PKFZ-laden Chan Kong Choy the freedom to allow Air Asia to steal away MAS profitable routes under the Tingkat 4 designed National Airline Policy.

The official reason cited were the weaker demand, overcapacity and volatile fuel prices. The hedging losses for Quarter 1 was reported as RM557 million.

Bernama reported Idris saying MAS hedged 40% of its fuel needs for 2009 at US$103 per barrel, 60% for 2010 needs and 40% for 2011 needsd, both at US$100 per barrel. Current level is at US$60-70 per barrel. Those are massive position taking or in common lingo financial exposures.

Was Idris caught with the Nor Mohamad Yakcop bug?

Tan Sri Nor was personally responsible for evaporating some RM16 billion of the national foreign reserve. The massive losses was due to speculative short term position taking and hiding trading losses into the reserve account, just like the 1888 account of the Baring financial failure.

Profitability

AFP reported the RM695 million quarterly loss compares with a net profit of 120.1 million ringgit a year earlier. It was the first quarterly loss for the company in two-and-half years at the third quarter 2006.

When Idris Jala took over MAS, he declared a massive loss of RM1.7 billion. By that move, he hoped moving forward is only sunshine.

Malaysia Airlines' profit had only plummeted 71 percent in 2008 due to the global slowdown, while its fourth-quarter profits for 2008 were down 81 percent to 46 million ringgit from 241.9 million ringgit a year ago.

On the operational side, MAS posted a loss of 138 million ringgit. Revenue for the first Quarter was RM2.7 billion, down from RM3.8 million a year earlier.

Sources within PMB claimed the airline operation losses is RM300 million, depending on how the accountants manipulate the booking of revenue and cost. If he had booked early the losses, when he came in, this time around it is to delay the realisation of losses.

The company cited “the triple squeeze of overcapacity, extreme fuel volatility, and a global slump which hit passenger and cargo demand" as the reason for the loss.

Not mentioned is the oppurtunity loss that translate to the operational loss arising from the reducing market share in a declining market. Talk to Travel Agents to know the endemic operational problems in MAS.

The operational loss is proof of inexperiance in airline operation of Idris Jala's team. Including himself, his hiring of non-airliner and inexperianced young figure crunchers from Ernst & Young to the top management and key committee is taking its toll.

Hedging

Business Times Singapore reported AirAsia made a RM472 million loss in its last fiscal year to end-December after getting hit on its hedge. They took a one-off charge of RM426 million in the last quarter to get out of hedging completely. AirAsia resorted to the spot market for its fuel needs until there is greater stability in crude prices.

One oil analyst of a GLC CEO material met last night said, MAS made a cardinal and costly mistake to hedge on long term basis during highly volatilite market situation. High volatility is a situation of extreme uncertainty and hedging is taking a gamble. This bloggers concur with him.

When oil price was scaling up till US$140 per barrel last year, it is widely known that it was an artificial market pandemonium of panic buying talked up by trading houses analyst. The spike were on thin trading volume. This was the time that Pak Lah hike retail oil price by 78 sen and later saw spot oil prices tumbled down.

Oil economist having taken into account the suppply, demand and historical pricing characteristics insisted the fair value of oil was at US$60-70 per barrel. Water will eventually find its true level and oil price is at its temporary equilibrium state at the current level of market. Temporary because market always change.

Business Times reported Tengku Azmil excused MAS by saying, "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."

No, Azmil. Never follow the herd. Let others make the mistake. MAS does not have to.
His answer is indicative of decision made for excuse in the event of failure and not made on good judgement. This is typical accountants' conniving politics.

Did Azmil made the hedge because other Airline did or it was the necessary thing to do? Did he understood the risk and market behaviour?

The problem is not about hedging of taking long/short or buy/sell position but taking long term futures contract, when market condition was more suitable for spot or longest one month futures. Just like Pak Lah, he panicked at market top. Did the same adviser to Pak Lah advised MAS?

Despite claim by Idris that there will be a writeback of RM1.1 billion in the next quarter, it just prove to show the airline is in dire needs of treasury man with experiance in the market and true airliner to turnaround the organisation.

The mark-to-market practise to recognise fuel hedges under new accounting rules to reflect their market value took a charge of RM3.8 billion from its balance sheet. Raymond Yap, an analyst at CIMB investment bank was reported in Business Times today saying MAS is theoretically insolvent. However, MAS still has 0.95 ringgit net cash per share.

The more the reason for new set of team to takeover, from Adviser down to the CFO and the various management team. It is no more time for guesswork from industry newbies.

------------------------

June 12, 2009 20:02 PM

MAS Faces 'Triple Squeeze'

PETALING JAYA, June 12 (Bernama) -- Malaysian Airline System Bhd (MAS) registered losses for the first quarter ended March 31, 2009 as it faced a "triple squeeze" -- overcapacity, extreme fuel volatility and global slump which hit passenger and cargo demand.

MAS registered a net loss of RM695.398 million compared to a net profit of RM120.06 million in the same quarter last year.

"It reported a first quarter 2009 operating loss of RM138 million, the first for the airline since third quarter 2006," said Managing Director and CEO Datuk Seri Idris Jala, when announcing the company's first-quarter results here Friday.

MAS also saw losses from fuel hedging amounting to RM557 million.

Revenue declined to RM2.7 billion from RM3.75 billion previously, in the face of the worst global recession in 70 years, with seat factor dropping 13.1 percentage points.

Passenger yield, however, was up four percent to 29.5 sen/revenue passenger km (RPK).

Idris said MAS, however, has strong liquidity and RM3.8 billion cash in its coffer, thanks to its across-the-board cost-cutting measures and cash conservation stance.

"Cost savings over the last three years amounted to RM2 billion.

"To-date we have proactively cut capacity by 11 percent in 2009 and we have put in place stringent controls over costs and investments," he said.

Total expenditure for the quarter decreased by 20 percent, mainly due to a RM730 million reduction in the total fuel bill as a result of lower price and consumption, he said.

He said MAS expected to save RM700 million to RM1 billion this year with among others, a freeze on recruitment as well as budget cut of seven percent across-the-board in 2009.

"There is also a freeze on all discretionary training and travelling and it is not taking any delivery of new aircraft until end-2010," he said.

Besides this, MAS has adopted an aggressive sales approach, especially via Internet, he said, adding that its focus in 2009 was to continue its competitive fares initiatives to stimulate demand.

Shareholder equity, however, shed by RM459 million which meant that technically, MAS met the definition of Practice Note 17 company but it has obtained exemption from Bursa Malaysia with its strong cash balance, he said.

He said effective 2009 financial year, MAS has adopted the new accounting standard, FRS 139, which would be mandatory in Malaysia effective Jan 1, 2010.

"This provides the financial community with transparency of its financial results, enabling them to evaluate MAS on a like-for-like basis as its peers.

"Many airlines have already adopted similar accounting standards," he said.

With the adoption of FRS 139, the unrealised mark to market (MTM) fuel hedges, foreign exchange and interest rates that were off the balance sheet, were recognised on the balance sheet, he said.

Idris said however, the unrealised fuel MTM were contractual fuel hedge arrangements over the next three years to 2011.

"There will be no impact on the profit and loss. The fuel MTM losses are effectively 'paper losses' and will only be realised over the next three years. The quantum realised depends on the actual oil prices," said Idris.

He said the fuel MTM was sensitive to oil price movements.

"Assuming all things remain equal, MAS could potentially see a hedging gain of RM1.1 billion in second quarter of 2009 based on the fuel price of US$66 per barrel on May 29, 2009.

"This could mean that MAS' RM695 million net losses in first quarter could be fully reversed by the RM1.1 billion potential gains," he said.

MAS has spent RM400 million to restructure some of its hedges, he said.

For 2009, it has hedged 40 percent of its fuel needs at US$103 per barrel, while for 2010 and 2011 is 60 percent and 40 percent respectively at US$100 per barrel, he said. -- BERNAMA


* Edited and updated 9:30 pm

18 comments:

Anonymous said...

Good one, voicey. Many heads must roll starting with black midas and amokh. These billions loss can be used to feed the poor millions.

Anonymous said...

I believe Idris Jala took that decision as it was the best at the moment.

Imagine if the JetA1 price goes higher. I am sure we would pay more to travel and again, being malaysian, we will fret about it.

The downfall of the fuel price cannot be predicted. Thus, I believe Idris Jala is one competent CEO.

When he turnaround MAS, what credit did he get?

When hedging goes north, the brickbats and boohoo boys came in.

Such a pity and discouragement to a stellar CEO, pure talent of Malaysia.

Shame on you ungrateful bunch!

donplaypuks® said...

What is astounding is that the KLSE did not enforce its PN17 rule for MAS's shareholders' funds moving by huge numbers into the Negative Zone. It was waived on the grounds that MAS had cash reserves!!??

But if the hedging losees continue, then the shareholders' funds will move further into the Twilight Zone!

Once again, we have 1 rule for the small fry and 'national interest' rules for companies whose 'project cannot, must not, ever fail!!'

A Voice said...

Anon 11:58 PM said:

I believe Idris Jala took that decision as it was the best at the moment.

You are giving an apologetic answer that has no strong argument.

Think thoroughly.

Do you really think it is competent to commit 50% of MAS fuel needs from 2009-2011 at US$100 per barrel?

That is over commiting and risky. It shows MAS top management inexperianced and incompetence.

If market went further up, then naturally airline prices can be upped or surcharge imposed?

Did they think about the downside and impact on capital base?

The downside includes being saddled with high cost when market turned around and it was even obvious to an ex-trader not monitoring day to day.

The impact on the company's capital is also determined.

I know we did when trading those days. Limits and exposure is set based on shareholders capital of our counterparty. More so on the company capital base to determine exposure.

This is basic asset liability management. How amateurish a mistake?

Maybe we didn't have compuetrs as sophisticated as today then, but is there no more such needs with the advent of computers?

Anonymous said...

That's why Allah has said it is haram to terlibat in gambling related activities. I guess I'll have to short my MAS shares now LOL!

Anonymous said...

Voice,

Lepas ni aku kena apply kerja jadi GM incharge of bicycle rental operation kat Taman Botany Putra Jaya. Situ aku do not have to worry about hedging future fuel price increase.

GM MAS Fleet Management

Anonymous said...

Dear Voicey,
Please do not blame Pak Lah for this. Even his predecessor made a lot of mistakes hiring Eric Chia, Mirzan, Tajuddin Ramli, Pek Moh's brother to undertake positions in the GLCs or companies with huge government investment. But nobody seems to blame him.

MAS managers just seem to agree and nod their heads. I hope maybe MM can bring this up in the Parliament.

A Voice said...

Anon 11:21 AM

The current problem in MAS was not created by his predecessor.

Just becasue Dr M allegedly made mistake in appointing Eric Chia, Mirzan, Tajuddin Ramli, and Pek Moh's brother (I don't know who this person is), it does not make Pak Lah innocent.

Wrong is wrong. Take it case by case.

If you have a case agst Tun, go ahead to take issue with him. He has allowed himself to be questioned and he has answered.

Anonymous said...

Pek Moh is Arif Shah Oman Shah, his brother is Amin Shah
:)

Tkt 4 MAS said...

The top mgmt screwed fuel management and now they are in Jo'berg discussing pay cut.

Will they cut their pay????

Nooo ... off course not. There is the contract.

Anonymous said...

Ya, betul tu pak. Di MAS, siapa yg banyak buat silap dan pandai bodek boss, lagi cepat naik pangkat. Jala pun bodek top mgmt untuk extension. MASwATCH.

Dhahran Sea said...

Salam Voice,
Another case that convinces me that when we have accountants & financial assholes running companies that have to excel operationally, we are going to have short-termism strategies that rely heavily on number-juggling that effectively produces time-bombs ready to explode... we are seeing this happening with Proton, UEM, MAS, TNB... heck! With all the GLCs!

Anonymous said...

i personally hoped that idris would clarify these accusations ...as what tajuddin dit for uem.

Anonymous said...

A Voice,

"Do you really think it is competent to commit 50% of MAS fuel needs from 2009-2011 at US$100 per barrel?"

Did anyone expect the financial crisis which brought down the fuel price? The price of crude just before the crisis hit USD150 with no sign of going down. Hedging at USD100 at that time would not have been such a bad idea.

At times like these, even Warren Buffet lose money and he's the all time best investor in the world.

I think the best and most competent person must be one which has hindsight as his guide :-)

Anonymous said...

Nobody is saying you shouldn't hedge but when the oil price is volatile and is moving up or down very fast, there will eventually be a retracement. Therefore you should monitor everyday and hedge shorter positions rather than take long term hedge positions so that you are not stuck with bad decisions.

People have to make decisions in business but try to limit making bad ones and this is clearly a bad decision.

Anonymous said...

"People have to make decisions in business but try to limit making bad ones and this is clearly a bad decision."

There is still no actual loss. This is still MTM and not actual. To say it's a bad decision now before the loss has materialised is premature.

You can see that it is June 2009 and the price has gone up to USD78, 20% from last month. How much would it be in 2 years time? If the price went up, Idris would be a genius and Tony would be a fool. If prices remains, it would be vice versa. I am sure there are a lot of people who can give a different view to the one I am making here. It's nice to get into what ifs and the potential outcomes.

In business, I think, sometimes you can only make a decision based on experience and current info and hope for the best. The business must go on. It cannot wait for the most number of analyses before making a decision, at times.

In this case, let us all hope for the best. Nobody is the winner if MAS loses money.

Anonymous said...

Agree that some of the loss has not materialised as we still have a ways to go for the MTM for the full year is realised.

I'm just saying that when there is high volatility you don't take long term positions. You spread your risk by taking shorter positions anf buying on the spot market and continually monitor all the way. That why I think its a bad decision.

Anonymous said...

The losses are on paper since MAS started adopting FRS 139 which requires all financial instruments to be MTM. The fuel hedges have yet to unwind hence the cash reserves of over RM3 billion.

If you're not from the oil and gas fraternity in Malaysia, you would not understand Idris' reputation prior to his arrival at MAS. He rose up the ranks in Shell, an organization that promotes employees based on merits and not by the color of your skin. Idris turned around the SMDS plant in Bintulu after the Christmas night explosion that destroyed the plant in 1997 (no, he was not running the plant when it exploded).

Many only consider the Perwaja fiasco when judging Eric Chia. If it was not him, UMW would not be where it is today.

My Say