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Saturday, August 21, 2010

MAS seems adamant about sticking to its fuel-requirement policy

SO, reporting a net loss is always awful. After all, which shareholder would want to make a shortfall in his investments?

But so often, the accounting loss – and for that matter, profit – does not always give an accurate picture of things.

The numbers are such because certain principles as ruled appropriate by professional bodies require companies to take into account non-operating gains or losses and incorporate them into their profit statements.

In the case of Malaysian Airline System Bhd (MAS), it’s the Financial Reporting Standard 139 (FRS 139). The national carrier has adopted this standard – which requires it mark to market its fuel-hedging positions and include the resulting loss or gain into its profit statement – since early last year.

On Monday, the company announced it booked a net loss of RM537mil for the second quarter ended June 30. That seemed an unpleasant position in which to be compared with a handsome net profit of RM876mil for the previous corresponding period.

Analysts say it is crucial for MAS to focus on significantly improving its yield to achieve its full financial year profit target of RM100mil to RM300mil

Stripping off the hedging loss of the second quarter and gain of the same quarter last year, however, MAS’ financial position has actually improved – operational-wise, that is.

Loss from its operating activities has narrowed from RM426mil in the second quarter of the financial year ended Dec 31, 2009 (FY09) to RM286mil in same quarter of FY10, marking an improvement of 33% year-on-year in performance.

So, as much as MAS’ marked-to-market fuel-hedging gain made it looked good in the second quarter of FY09, its marked-to-market fuel-hedging loss for the same quarter in FY10 had negatively impacted its overall financial position.

Nevertheless, MAS seems adamant about sticking to its fuel-hedging policy. The company has hedged 60% and 40% of its fuel requirements for FY10 and FY11 respectively, at US$100/barrel WTI (West Texas Intermediate).

Some investment banks think that is somewhat over-hedged. OSK Research, for instance, explained in its recent report that it did not foresee oil prices reaching such levels by year-end.

According to the US Energy Information Administration last week, the spot price for WTI crude oil was projected to average at only US$81/barrel in the fourth quarter and US$84/barrel next year.

But MAS managing director/chief executive officer Tengku Datuk Azmil Zahruddin at a briefing on Monday asserted that the company’s decision to maintain the hedge was a good one, given the unpredictability of fuel prices. It expected fuel prices to continue rising over the medium term.

An analyst from another local research house questioned such judgement though.

She explained: “Crude oil prices could trend downwards as the pace of recovery moderates. As it is, there are still a lot of uncertainties surrounding the global economic recovery.

“We think the airline’s bet is slightly overdone; and that could be a burden ... But, then again, its bet could turn out right.”

The average price of jet fuel for the second quarter of this year was around US$90/barrel. MAS booked an MTM loss of RM217mil for its second quarter.

Regardless, analysts believe that MAS is making gradual improvements on its operations end.

This is evident in the improvements of its overall operating indicators for the quarter in review. These include MAS’ load factor, which rose the highest in the past five years at 74% year-on-year; revenue per available seat kilometre (RASK), which rose 15% year-on-year to 17.7 sen; and yield, which improved 2% year-on-year to 23.9 sen.

Operating cost was higher by 18% year-on-year, but this was offset by the 26% year-on-year rise in its revenue, resulting in narrower operating loss for the second quarter.

MAS may not have fully turned around from its operating loss position, but some analysts point to the improvement in its operating cash flow as a sign of the company turning around its business.

From a deficit of RM468mil at end-March, MAS managed to lower it to a deficit of RM288mil at end-June. (At end-June last year, the company had a negative cash flow of RM1.5bil.)

At present, MAS’ operations are lagging behind its regional peers such as Cathay Pacific and Singapore Airlines. Both the regional airlines managed to capture the recovery of the aviation market during the second quarter, with their RASK growth at 26% year-on-year. Yield for Cathay Pacific improved 18% year-on-year, while that of Singapore Airlines 15% year-on-year.

“Obviously, there is some catching up that MAS has to do to capture the recovering aviation market,” an analyst said.

Analysts said it was crucial for MAS to focus on significantly improving its yield to achieve its full-year profit target of between RM100mil and RM300mil for FY10, given the dismal performance it had registered so far.

Historically, MAS’ RASK is always higher in the second half than the first half of the year. On average, over the last five years, the variance had been around 10%.

“So, there is great potential for MAS to meet its full-year profit target,” an analyst said.

MAS slumped eight sen to close at RM2.20 yesterday. Prior to the release of the results on Monday, the counter gained 14 sen to close at RM2.28.

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