Coming soon: AirAsia's billion ringgit crash
As reported in Forbes Asia, 12 Jan 2009:
And in the third quarter, ended Sept. 30, the airline suffered its first net loss since it went public in 2004--a total of $136 million, much of that because the airline hedged against higher oil prices before they fell dramatically. More losses are coming because it thought oil prices would remain at $70, but now they've fallen below $40. Even at $50 the airline projected it would lose some $481 million on its soured hedges, though Fernandes says the lower fuel prices will allow him to make up the losses in three months. Some analysts have downgraded the stock from neutral to sell.The Group seeks to hedge this fuel price risk by entering into jet fuel derivatives contracts.
( Hit By Turbulence; Fewer people are flying, but AirAsia is deploying more planes. Tony Fernandes bet wrong on fuel prices, but his play for discount travelers may pay off. Ioannis Gatsiounis and staff ;12 January 2009, Forbes Asia .http://www.forbes.com/global/2009/0112/070.html)
Readers should note the following:
a) Even if losses are limited to USD 481 million, that loss translates at current exchange rates (approximately USD1=RM3.6) into a Ringgit loss off approximately RM 1.73 billion.
Yes, there could be savings on the lower oil price, but that is still a cash outflow.
The question here is-can AirAsia afford any kind of cash outflow after suffering such a massive loss ; put in another way, can AirAsia last 3 months?
Tony has said ""I really don't think most analysts in this part of the world know what they're talking about,... "All I'm seeing is a very strong load."
(http://www.forbes.com/global/2009/0112/070.html)
The problem is-this strong load comes at a cost to revenues, especially given AirAsia's never-ending specials, reminiscent of shops that seem to perennially offer "closing" sales.
b) AirAsia appears in the medium term to be reliant on commodity deals to even finance its new planes. The financing of its SPV that will be used to borrow and purchase its new Airbuses is reliant on commodity deals between itself and Bank Rakyat-see http://www.bernama.com/finance/news.php?id=372896
To complicate matters AirAsia does not hedge jet fuel with jet fuel derivatives but with crude oil derivatives, introducing a further element of risk into its hedging contracts. This change in its hedging policy can be seen from the following statements:
In its prospectus issued in late 2004 AirAsia said:
AirAsia has entered into jet fuel derivatives contracts to hedge against increases in jet fuel prices for the year ending 30 June 2005.
(see page 31 of the Prospectus archived at www.airasia.com)
However by 2006:
Of the total volume, 75% of the requirement was hedged based on WTI crude oil within the pricing band of USD40 to USD52 per barrel. The pricing band for the remaining 25% is between USD48 and USD60 per barrel.
(www.airasia.com/storage/bo/aaportal.model.ContentFileUpload/847d15fb-ac1e00ae.../AA_3Q06%20Bursa%20Announcement.pdf)
This change in hedging policy may have occurred earlier, but the issue here is the policy of hedging jet fuel with crude oil contracts, therefore introducing the risk of a price mismatch.
As HSBC put it, commenting on AirAsia's overall hedging strategies:
We maintain our long-held view that Air Asia create rather than eliminate risk via its derivatives positions, especially where they are off balance sheet and poorly disclosed...We continue to value the company using asset replacement value, add non-aircraft assets less liabilities and obtain a revised target price of MYR0.60 based on our revised earnings. Risks include Air Asia providing limited disclosure about its derivative positions, making it difficult to assess its gains or losses.
(http://www.forbes.com/afxnewslimited/feeds/afx/2008/11/30/afx5757427.html)
I have previously noted that AirAsia may be in breach of its loan covenants, due to its losses which are should be higher than reported, and to the fact that it has suffered a loss in operating cash flow-see http://sahathevan.blogspot.com/2008/12/is-airasia-in-breach-of-any-of-its-loan.html
And in the third quarter, ended Sept. 30, the airline suffered its first net loss since it went public in 2004--a total of $136 million, much of that because the airline hedged against higher oil prices before they fell dramatically. More losses are coming because it thought oil prices would remain at $70, but now they've fallen below $40. Even at $50 the airline projected it would lose some $481 million on its soured hedges, though Fernandes says the lower fuel prices will allow him to make up the losses in three months. Some analysts have downgraded the stock from neutral to sell.The Group seeks to hedge this fuel price risk by entering into jet fuel derivatives contracts.
( Hit By Turbulence; Fewer people are flying, but AirAsia is deploying more planes. Tony Fernandes bet wrong on fuel prices, but his play for discount travelers may pay off. Ioannis Gatsiounis and staff ;12 January 2009, Forbes Asia .http://www.forbes.com/global/2009/0112/070.html)
Readers should note the following:
a) Even if losses are limited to USD 481 million, that loss translates at current exchange rates (approximately USD1=RM3.6) into a Ringgit loss off approximately RM 1.73 billion.
Yes, there could be savings on the lower oil price, but that is still a cash outflow.
The question here is-can AirAsia afford any kind of cash outflow after suffering such a massive loss ; put in another way, can AirAsia last 3 months?
Tony has said ""I really don't think most analysts in this part of the world know what they're talking about,... "All I'm seeing is a very strong load."
(http://www.forbes.com/global/2009/0112/070.html)
The problem is-this strong load comes at a cost to revenues, especially given AirAsia's never-ending specials, reminiscent of shops that seem to perennially offer "closing" sales.
b) AirAsia appears in the medium term to be reliant on commodity deals to even finance its new planes. The financing of its SPV that will be used to borrow and purchase its new Airbuses is reliant on commodity deals between itself and Bank Rakyat-see http://www.bernama.com/finance/news.php?id=372896
To complicate matters AirAsia does not hedge jet fuel with jet fuel derivatives but with crude oil derivatives, introducing a further element of risk into its hedging contracts. This change in its hedging policy can be seen from the following statements:
In its prospectus issued in late 2004 AirAsia said:
AirAsia has entered into jet fuel derivatives contracts to hedge against increases in jet fuel prices for the year ending 30 June 2005.
(see page 31 of the Prospectus archived at www.airasia.com)
However by 2006:
Of the total volume, 75% of the requirement was hedged based on WTI crude oil within the pricing band of USD40 to USD52 per barrel. The pricing band for the remaining 25% is between USD48 and USD60 per barrel.
(www.airasia.com/storage/bo/aaportal.model.ContentFileUpload/847d15fb-ac1e00ae.../AA_3Q06%20Bursa%20Announcement.pdf)
This change in hedging policy may have occurred earlier, but the issue here is the policy of hedging jet fuel with crude oil contracts, therefore introducing the risk of a price mismatch.
As HSBC put it, commenting on AirAsia's overall hedging strategies:
We maintain our long-held view that Air Asia create rather than eliminate risk via its derivatives positions, especially where they are off balance sheet and poorly disclosed...We continue to value the company using asset replacement value, add non-aircraft assets less liabilities and obtain a revised target price of MYR0.60 based on our revised earnings. Risks include Air Asia providing limited disclosure about its derivative positions, making it difficult to assess its gains or losses.
(http://www.forbes.com/afxnewslimited/feeds/afx/2008/11/30/afx5757427.html)
I have previously noted that AirAsia may be in breach of its loan covenants, due to its losses which are should be higher than reported, and to the fact that it has suffered a loss in operating cash flow-see http://sahathevan.blogspot.com/2008/12/is-airasia-in-breach-of-any-of-its-loan.html
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