AIRASIA's FUEL SPECULATION BINGE ENDS WITH 3QFY08 LOSS OF RM465M

CLASSIFICATION: ACCOUNTING/AUDIT NOTIFICATION/ANALYSIS & BUSINESS PROJECTIONS TYPE: Short Analysis / Reviews 01 December 2008

AIRASIA's FUEL SPECULATION BINGE ENDS WITH 3QFY08 LOSS OF RM465M By J Vong AIRASIA's investor relations department has been less loud with its releases in the past 2 quarters typifying almost third-rate-run listed companies in respect of informing their investors promptly and clearly. This was, of course, not lost on the small investor who had been piqued for the last 3 quarters following some research house's alert that AIRASIA had taken bold forward selling positions in oil options at USD92.50 per barrel. Oil prices, of course, obligingly rose to USD147 per barrel to upset AIRASIA's 'hedging' plans. NEW DEFINITION OF HEDGING When AIRASIA realised that it may have gotten in at the wrong end of oil price movements, the Company announced that the oil options 'selling' was for 'hedging' purposes and that losses could be minimised through a reversal of positions. The Airline claims of its fuel hedging (which is for consumption) and losing money in a price uptrend is definitely unusual. That points to speculation rather than hedging. TONY FERNANDEZ, the CEO, must come on record of having the distinction of trying to redefine the meaning of 'hedging'. Hedging as we were taught in university meant the buying or selling forward of positions where there was certainty of consumption or output. AIRASIA is well known for its forward sales of airline seats for cash. So 'hedging' would have meant the forward buying of it required oil positions which any small investor would have thought to be 'smart' and 'safe'. Obviously, AIRASIA 'sold' forward oil positions and turned itself into an commodities speculator instead of being just an airline operator. So 3QE Sep 2008 Loss of RM465m must be something of a record of sorts (wiping off the entire YTD earnings plus more) for which the CEO must bear full responsibility. 3QE SEP 2008 FINANCIALS SEES SHARPLY HIGHER REVENUES For 3QE Sep 2008, AIRASIA recorded sharply higher Revenues of RM658m against RM461m in 3QFY07. Gross Profit from Operations was RM103m or 15.6% on Revenue against RM166m or 36% in 3QFY07. Profit from Operations dropped to RM91m or 13.8% from RM145m or 31% in 3QFY07. 3Q-FY08 reflected the huge impact of rising oil prices on AIRASIA's operations. But despite that, the Airline turned in an Operating Profit due in no small part to its extremely strong Revenue growth of 42.7% over 3QFY07. 9ME SEP 2008 FINANCIALS For the 9ME Sep 2008, the Cumulative Loss was RM294.8m or 12.4 sen per share wiping off 2008 cumulative earnings plus more. 9M-FY08 Revenue rose to RM1.80 bil. compared with 9M-FY07 Revenue of RM1.30 bil - a sharp 38.4% growth. Revenue growth was due largely to the new aircraft deliveries and an expanded route network. INTEREST CHARGES Actual interest charges for its secured Borrowings of RM6.35 bil. for 3QE Sep 2008 recorded a Net Interest Expense of RM80m after taking into account Interest Income. The effective interest rate on borrowings amounted to 5.2%. This reflected that AIRASIA was still profitable operationally despite the turbulent period of oil price surge. 3QFY08 FUEL SPECULATION LOSSES 3QFY08 speculative losses were, however, very large. AIRASIA recorded a Loss of " .... RM215m ... for the .... unwinding of our fuel derivative contracts and also the likely non-recovery of margin held by LEHMAN BROTHERS COMMODITY SERVICES inc ...(which filed for bankruptcy on Sep 15, 2008) ....". The Company also said that fuel prices are now trading at levels last seen in 2005. FUEL HEDGING AIRASIA in its 3QFY08 report now says that the Group as at Sep 30, 2008 had partial cover over 35% of its fuel consumption for Yeas 2008 and 2009. The statement which was released on Nov 28, 2008 also said that ".... the Group had subsequently liquidated its positions to take opportunity of the lower spot prices....". There goes another ambiguity in its disclosure. However, AIRASIA cautions that with the current weakening of the Ringgit against the USD it will have a negative financial impact. 3QFY08 FOREX TRANSLATION LOSS OF RM212M WITH POTENTIAL FOR REVERSAL 3QFY08 Forex Translation Losses were RM212m. The Company said that the Loss could potentially turn into " .... a gain of RM365.6m ..." based on the USD Exchange rate which can only " .... be reflected in the financial statements upon realization over the duration of these contracts ....". AIRASIA said that the Group " .... had hedged 75% of its dollar liabilities pertaining to its aircraft, engine and simulator loans into Ringgit by using long dated foreign exchange ....". The Group had also entered into " .... interest rate swaps (some of which are capped) to hedge against fluctuations in the US-LIBOR on its existing and future aircraft financing for deliveries between 2005 and 2009. The effect of this transaction enables the Group to pay fixed interest rate of 3.25% on Ringgit and between 4.55% and 5.2% on USD over a period of 12 to 14 years ....". CAPEX COMMITMENTS AIRASIA said that as at Sep 30, 2008, the Company had contractual Capex commitments for RM16.81 bil. and Authorised but uncontract Capex of RM7.29 bil. giving the Group a total of RM24.1 bil. in Capex spending. NON-RECOGNISED ASSOCIATE LOSSES AIRASIA's associates THAI AIRASIA and INDONESIA AIRASIA continue to be loss-making. FRS 128 defines interest (equity) in an associate as " ... the carrying amount of the investment ... under the equity method together with any long-term interests that, in substance, form part of the investor's net investment in the associate ...". On the above basis, the unrecognised share of Operating Loss as at Sep 30, 2008 amounted to RM75.8m in THAI AIRASIA and RM89.5m in INDONESIA AIRASIA. The associates continue to be loss-making. DEFERRED TAXES AIRASIA enjoys tax deferment for reason of its capex spending. There have been detractors from the way the Company treats its deferred tax. As at Sep 30, 2008, Deferred Tax recorded RM146.2m. CASH BALANCE Cash Balance as at end Sep 2008 was RM774m compared with RM547m as at end Sep 2007. OPERATIONS OVERVIEW AIRASIA reported that for 3QE Sep 30, 2008, the Airline experienced 'seat load factor' of 75% compared with 76% for the immediate preceding quarter. The was explained as being in line with seasonal fluctuations. PASSENGER VOLUME GROWTH STILL HIGH Passenger volume grew 24% in 3QFY08 to 3.01m passengers compared with 3QFY07. In 2QFY08, the Airline carried 2.82m passengers. Average fare was higher by 12% at RM195 compared with RM174 in 3QFY07. The higher average fare was due to ancillary income and from the increase in fees. The lower overall load factor to 75% was due to significant seat capacity addition during the period and the full impact of the Moslem fasting month. For 3QFY08, Revenue per Available Seat Kilometre (ASK) was 13.63 sen. Cost per ASK was 13.54 sen and Non-Fuel Cost per ASK was 4.43 sen. The average number of operating aircraft during 3QFY08 was 38.19 compared with 36.6 in 2QFY08. PERFORMANCE OF ASSOCIATES THAI AIRASIA operations continue to be challenging due to the political street demonstrations. THAI AIRASIA achieved a load factor of 79% and a on-time performance of 93%. THAI AIRASIA now operates 7 new Airbus 320 aircraft. INDONESIA AIRASIA achieved load factor of 78% down from 2007 load factor of 79%. The Indonesian outfit which operates Boeing 737s has received its first Airbus 320 on Sep 19, 2008.