MAS Hedge Down on Unclear Economy

Friday March 11, 2011
By JEEVA ARULAMPALAM
jeeva@thestar.com.my


Higher entry cost also reason for cut in fuel hedge to 25%

PETALING JAYA: Uncertainty in the economic recovery and higher fuel hedging entry cost are some of the reasons why Malaysia Airlines (MAS) drastically reduced its fuel hedging levels this year to 25% from 60% last year.

“The hedging range in the airline industry has been lower since 2008 due to the uncertainty in economic recovery, fuel price volatility and the higher fuel hedging entry cost,” MAS chief financial officer Mohd Azha Abdul Jalil told StarBiz in an email response.

He said the national carrier continued to practice competitive hedging with 25% of its fuel requirements this year hedged at US$88 a barrel (West Texas Intermediate and cash basis).

“This is in line with our peers. With travellers becoming more accustomed to fuel surcharge, it is now a common instrument in the industry to partially manage the rising fuel costs,” he said.


MAS planes are parked at the tarmac of the KL International Airport. The national carrier’s fuel hedge levels are said to be in line with its benchmarked peers, with current hedge levels ranging from 17% to 35%. — AFP

MAS' fuel hedge levels are said to be in line with its benchmarked peers, with current hedge levels ranging from 17% to 35%.

MAS entered into various fuel hedging contracts for three years from 2009 to 2011 with many contracts priced around US$100 a barrel, after oil prices skyrocketed to a high of US$147 per barrel in mid-2008. However, spot oil prices began tumbling drastically in late 2008 and early 2009, causing MAS to make “paper losses” of some RM3.8bil as at Jan 1, 2009 for its three-year contracts collectively.

Effectively, the actual loss experienced by the airline will only be realised when these various contracts expire and at the price of oil then.

Since oil prices have been on an uptrend after collapsing in late 2008, MAS has narrowed its paper losses for its existing fuel contracts.

Based on its financial statements to Bursa Malaysia, the airline's gain on fuel hedging contracts for financial years ended 2009 and 2010 amounted to RM1.15bil and RM194.6mil respectively. This is representative of contracts that had expired and the fair value of existing contracts, as required under financial reporting standard 139.

The airline has been pro-actively restructuring its 2011 fuel hedges since last year to bring down the hedge levels (from 40% to 25%) as well as the hedging price (from US$100 to US$88 a barrel).

Now that spot oil prices have hit new highs in over two years and driven jet fuel prices to US$134.7 per barrel due to political unrest in Libya, analysts said that MAS would definitely benefit from higher hedging levels.

“No doubt, MAS would gain from higher levels of fuel hedging in the current environment but it is difficult for them to gauge how much to hedge and at what price, unless MAS has a strong treasury team to do this,” said an analyst with a foreign research house.

A local bank-backed analyst said that it was difficult to predict the potential gains from the airline's fuel hedges against the higher fuel costs it would pay at pump prices.

However, analysts said that a lower hedging level would work best for MAS now so that it was not over-hedged and considering the unpredictability of oil price volatility.

Reuters reported in January that top global airlines such as Cathay Pacific, Singapore Airlines and Qantas Airways are staying away from further hedging jet fuel purchases as these airlines have withstood prices far higher than the current levels and as the industry has not quickly forgotten Japan Airlines' bankruptcy, triggered by wrong bets on crude prices.

Meanwhile, budget carrier AirAsia Bhd has hedged some 21% for up to the second quarter of this year at an average US$92.31 per barrel (fixed swap West Texas Intermediate).

“While the budget carrier has hedged up to April, it has more room for flexibility in its hedging policy as higher fuel costs can be offset by its growing ancillary income,” said a foreign research analyst. “For example, the sale of insurance policies would be a clean profit for the airline if no claims are made.”

AirAsia has said that every RM1 per passenger spent provides about US$1 per barrel of buffer.

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