when the TAG team was running the show giving a dismal performacne.(2 hands clapping) now with only one hand remaining can it be any better?
And do not forget that in semuanya-ok-land the more lousy your performance the faster you are kicked upstairs(promoted) no such thing as resigning and asking for forgiveness as the japanese and koreans do.
p.s. he was promoted before he resigned
Saturday August 8, 2009
Turbulence at Malaysia Airlines
A QUESTION OF BUSINESS WITH P. GUNASEGARAM
MALAYSIA Airlines says its net profit of RM876mil for the second quarter of this year is its highest ever quarterly profit. Yes, that’s true but that’s not the whole truth.
The whole truth is this: The accounting profit due to hedging gains masks Malaysia Airlines’ serious operational problems caused by declining traffic and prices, and high costs. If it does not reverse this soon, it could well run out of cash not long from now.
Despite the net profit of RM876mil, Malaysia Airlines had an operating loss of RM420mil for the same period, after taking out a gain of a massive RM1.34bil from a partial reversal of provisions of nearly RM4bil for derivative losses.
How’s that possible? How could accounting net profit be so good but the actual financial position and outlook for the company be so dire? Here’s how.
Malaysia Airlines adopted Financial Reporting Standard 139 (FRS 139) from the beginning of this year. Effectively, this standard requires hedging positions to be marked to market value and the resulting loss or gain to be taken into the books.
On first adoption of this, Malaysia Airlines had huge losses of RM3.95bil, which were taken straight into the balance sheet – not via the profit and loss account. These losses are not actually realised but represent the losses if oil prices remained at the level they were at Jan 1, 2009.
For the first quarter of the year to March 31, 2009, Malaysia Airlines, as oil prices continued to decline, made huge hedging losses of RM567mil, pushing net losses to about RM695mil. Why, when oil prices are declining, should Malaysia Airlines lose in terms of hedging? That’s because Malaysia Airlines had hedged at prices believed to be roughly equivalent to around US$100 a barrel for oil.
While oil prices declined (to as low as US$30 a barrel), the losses from its derivative contracts increased as they are marked to lower fair values. That means it effectively continues to pay high prices because of the hedges which basically capped prices of oil but did not provide for benefits to flow if prices fell instead.
On hindsight that was a bad move because oil prices declined. But Malaysia Airlines practised what it called competitive hedging which means it did what most other airlines did when it came to hedging – a follow-the-leaders policy that has cost it dearly.
Why does it benefit when oil prices are rising? That’s because it has already taken a hit for when the price was low – remember the RM3.95bil charge against the balance sheet for derivative losses. That charge put it in negative territory in terms of accounting equity or shareholders’ funds even though it had cash of close to RM4.62bil then (Dec 31, 2008).
Because of this charge, any rise in the oil price towards US$100 a barrel enables recovery in proportion to the increase in oil price, and if the price goes up to US$100 or more a barrel it will enable the recovery of most of the RM3.95bil provision.
But here’s the important point to remember: Malaysia Airlines’ current profit and more are coming entirely out of the provisions for hedging losses it made – if there had been no provision, there would have been no profit.
And here is where the accounting standard fails in painting a true picture to the public.
The previous one-time charge was taken through the balance sheet. The standard, however, allows any subsequent gain in an accounting period to be taken through the profit and loss account, misleadingly inflating reported profit.
It would have been better if the gain had gone straight to the balance sheet via an adjustment to the value of the derivative contracts, leaving the profit unchanged. But such is accounting policy at times.
What would be a fairer and more accurate reflection of profit? It can be argued that this would be if all hedging losses/gains are allocated and expensed to the period in which they were realised. In other words, if actual incurred costs were used.
This would be if FRS 139 had not been introduced. Then, Malaysia Airlines would have reported a loss of RM803mil for the latest quarter and a loss of RM1.6bil for the first half of the year, according to figures disclosed by the airline.
That looks like a much fairer reflection of the actual predicament that it faces.
When accounting seems dubious in terms of painting the true picture, it always pays to look at the cash position.
For the first half of this year, figures show that operations drained nearly RM1.5bil in cash, almost equivalent to the loss if FRS139 had not been used. That means in a year, the airline could be out of cash if it does not start reversing the situation.
As at Dec 31, 2008, the airline had RM4.62bil in cash, reducing by a huge RM850mil to RM3.77bil as at March 31, 2009 and by a further RM830mil to RM2.94bil as at end-June 2009. That’s a rapid rate of cash depletion of almost RM1.7bil in a mere six months.
There’s still a lot of cash and it gives substantial cushion for the airline to weather the downturn but only if it can turn around into operational profit and start generating cash flow once again. At the moment, the airline is in the grip of a potentially lethal pincer attack – its high fuel expenditure caused by hedging that went wrong and severe declines in revenue caused by both falling prices and reduced demand.
That’s a terrible place to be and the public would have appreciated a straight address by the airline on these pressing issues instead of the emphasis on the record reported but misleading profits. How Malaysia Airlines is going to generate cash is the question to answer. By glossing over the whole truth (its media release never so much as mentioned an operating loss of RM420mil for the second quarter of the year or highlighted the drain on cash) and choosing to focus on record quarterly accounting profits, Malaysia Airlines does a disservice.
This is not only to its shareholders, mainly the Malaysian Government, but also its customers and the Malaysian public, which indirectly owns most of the company, all of whom deserve a clearer explanation of its financial situation and future plans.
lManaging editor P. Gunasegaram thinks that sometimes accounting is an ass, much like law is more often.