Regarding AirAsia Forex Losses.

Last nite I wrote, AirAsia Posted Massive Losses!

In which Jasonred79 said the following:

• Moo, you got some errors in your analysis:
  
  The Finance costs of 292,570includes a forex loss of 212,510.
  I assume we can count this forex loss as a one time event. Possibly reversable in fact.
  
  So, Airasia's "real" quarterly finance cost is around RM80 million.

Jason,

Thanks for your comments as usual.

Yes I am aware of what I wrote and yes I am aware that I deliberately included the forex losses in.

If you look at the third picture loaded https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgktx0MSdOSEhyYW5oogYc6BApM2dr2E-P_3iAxFhZHGwCPg1PsPtKUv3VXF9GwFbc4tpEH4qq9oez2cR418ImVIlfsFc2YjRmc53h-ShGcu3Ub8JUINvwdRuG-2TQP2WknlMROaQ/s1600-h/aa3.JPG, you can see that I had CLEARLY noted what's INCLUDED in AirAsia financial costs.

Now I had DELIBERATELY included the forex losses in it.

Why should I or why should anyone treat it as a one-off item?

I tell you what... it was just back in May 2008, AirAsia trumpeted about its strong earnings performance. Included in the STRONG earnings was a forex gain of around 86 million. (This issue was even noted by Seng in a blog posting, http://fusioninvestor.blogspot.com/2008/05/edge-on-airasia.html and http://fusioninvestor.blogspot.com/2008/06/airasia-still-profitable-on-us200.html)

So during the good times, forex gains were part of AirAsia good times.

So during bad times, forex losses SHOULD also be part of AirAsia bad times.

Should I even assume that this forex loss as a one time event? Should I assume that there is a possibly that a reversible is likely to happen?

I do not know. Do you know for sure?

Since we do not know for sure why shouldn't we treat it as it is?

For example, if I borrow a million dollars in USD and if the exchange rate of the ringgit to the USD is at 3.25, I had effectively borrowed 3.25 million ringgit.

Now say the exchange rate of the ringgit to the USD is CURRENTLY at say 3.50. My borrowings now is now 3.5 million.

Now I can argue that the current rates is only temporary and I can argue that a reversible can and should happen but I am sure that you will understand it's all futile for what I owe the bank currently is based at current rates.

And based on the current rates, my loans had increased and based on the current rates, the interests paid on the loans had increased.

And based on current rates, this is my REAL financial cost.

This is how I would treat it.

And if you think this is an error in my interpretation, then it's an error.

By the way, did you love the way Star Biz reported AirAsia massive losses? AirAsia revenue rises on high passenger volume

• By LEONG HUNG YEE
  
  PETALING JAYA: AirAsia Bhd, which posted its first loss since its listing in 2004 due to foreign exchange translation and hedging losses through Lehman Brothers Commodity Services Inc, reported positive growth in revenue due to higher passenger volume and higher contribution from ancillary income.
  
  It said yesterday that passenger volume grew by 24% to three million in the third quarter ended Sept 30 compared with 2.44 million a year ago.
  
  Average fare was higher by 12% at RM195 against RM174 previously. It expected to carry 20 million passengers across the AirAsia group this year.
  
  “The higher average fare achieved reflects the positive contribution from ancillary income and the increase in fees.
  
  “Load factor was 3.9 percentage points lower to 75% as a consequence of significant capacity addition and the full impact of the fasting month,” it said in a filing with Bursa Malaysia.
  
  Ancillary income increased 88% to RM69.7mil from RM37mil in 2007. Ancillary income currently represents 10.6% of its total revenue.
  
  Its Indonesian operations made significant improvements with a 61% higher yields compared with last year and a 78% load factor.
  
  Group chief executive officer Datuk Seri Tony Fernandes said the carrier was confident of offsetting the RM215mil related to the provisions for unwinding its derivatives structures and likely non-recovery of collateral for trades.
  
  “Our strategy is already in place to recover the losses. We have hedged 35% fuel requirement for 2009 and we are paying spot price for it (fuel),” he said in a telephone interview.
  
  “We do not want to be paying US$60 per barrel when the spot price is US$40, so we decided to buy on spot price. We get to lock in the potential gain by paying spot price,” he said, adding that AirAsia would be monitoring the fuel price movements.
  
  However, he declined to elaborate on AirAsia’s fuel hedging strategy.
  
  Fernandes also said the group’s finance costs had increased significantly as AirAsia had more planes now and would be getting nine new ones next year.
  He added that AirAsia had provided the full amount for unwinding derivatives structures and likely non-recovery of collateral for trades held by Lehman Brothers to be written off. “It’s best to assume that it is gone and it will be a bonus if we manage to recover it,” he added.
  
  He declined comment on reports that AirAsia’s major shareholder Tune Air Sdn Bhd was close to securing financing for a possible privatisation of the airline.

Ahem...

• However, he declined to elaborate on AirAsia’s fuel hedging strategy.

Huh?

Still got fuel hedging????

Sigh... see What Lah! Didn't AirAsia Said No More Oil Bets?

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Edit: 1:53 pm.

I just realised the following.... AA hedged their USD at fixed rates!!! Looks sketchy but this is what it is saying.

As per Note 29 (i), the Company has previously entered into a number of long-term forward contracts to purchase US Dollars at fixed rates. Based on the current outstanding principal amounts in respect of the contracts, the weighted average contracted rate and the prevailing exchange rate as at 30 September 2008, the Company could potentially enjoy a gain of RM35.6 million. However, this can only be reflected in the financial statements upon realization over the duration of these contracts.