And What About MAS Oil Hedges?

As pointed out by AhBeng in recent AirAsia discussions (see AirAsia Reported Massive Losses Again!!, Comments On AirAsia Exceptional Losses and Reply To Comments On AirAsia Exceptional Losses ) Malaysia Airlines (MAS) only announced its realised hedges and on Star Business today, the following article was published.

MAS stands to lose RM3bil in hedging costs

• Thursday March 5, 2009
  MAS stands to lose RM3bil in hedging costs
  By YVONNE TAN
  
  PETALING JAYA: Malaysia Airlines (MAS) stands to chalk up close to RM3bil in hedging costs over the next two years while its competitor AirAsia Bhd enjoys the benefits of lower crude oil prices, analysts say.
  
  An analyst estimated that MAS was currently sitting on a collective paper loss of around RM2.8bil for financial year 2009 and 2010 as a result of its hedging activities.
  
  MAS has hedged 64% of its fuel requirements for financial year (FY) ending Dec 31 at US$100 per barrel and 40% of FY10 at US$95 per barrel while crude oil is hovering around US$40 per barrel. The analyst estimates MAS using up to 16 million barrels of crude oil per year.
  
  “It is paying higher for crude as it has locked positions at US$100 and US$95 a barrel whereas the current price is only around US$40 a barrel,’’ the analyst said.
  
  The national carrier does not book any losses as it does not adopt the mark-to-market practice, which essentially means assigning a value to a position held in a financial instrument based on current market price.
  
  Kenanga Research said MAS’ FY09 hedge price was much higher than the figure revealed last year, which was 53% of FY09 crude at US$83 per barrel.
  
  “We suspect that the increase in FY09 hedge price could be due to non-linearity and complexity of the hedging instruments involved. As there are more than 80 fuel hedge instruments available in the market, these complicated derivatives when combined might have an adverse effect should spot prices reach a certain threshold,” it said.
  
  While analysts have raised concerns about MAS’ pricing ability which could be handicapped by its fuel hedge, they are equally concerned about AirAsia’s associates’ longer term prospects as these continue to gush red ink.
  
  However, AirAsia said it is now free of hedging contracts but not without having immense pressure on its profits in the second half of 2008. But going forward, AirAsia is in a better spot as it is paying market prices.
  
  AirAsia posted hefty losses of RM425.7mil in its latest quarter from the unwinding of its fuel hedge and interest rate swaps positions, which resulted in its exceptional losses increasing to RM833.4mil for FY08.
  
  The low-cost carrier had been buying fuel at spot price since the fourth quarter of last year and would start “on a clean slate” where hedging was concerned, analysts said.
  
  Hedges are essentially derivatives which airlines use to lock in a fuel price in advance to protect themselves from price volatility.
  
  The airline industry was plagued by record crude prices, which influenced jet fuel prices in the first half of last year.
  
  “Airlines entered into their hedging arrangements when it seemed that oil prices would not see their limit and that is why MAS is still paying more than double the current price,” an analyst noted.
  
  The global economic crisis has since brought prices well below the forecasts made by airlines when they bought into their respective hedges.