Published: 2007/12/05

Last edited on Thu Dec 6th, 2007 00:52 by slowday

Outlook uncertain on fuel price. We adjust our fuel consumption based on the excellent showing in 1Q from the A320s. At the same time, we revised up our effective jet fuel price for FY08 to US$83 per barrel which puts pressure on margins. To note AirAsia has sold call options for WTI at US$82.60 per barrel with a knock in price at US$90. This means that if oil continues to stay above US$90, AirAsia will incur additional cost for its jet fuel. The company stated that it has taken steps to mitigate the impact in 1Q2008. Based on this premise, we revise up FY07 and FY08 forecasts by 35% and 9% respectively. Fair value is raised to RM2.41. Nonetheless, because AirAsia will suffer high jet fuel costs if oil remains above US$90 after 1Q2008, we downgrade it to a Trading Buy and may adjust numbers once greater clarity on 2008 oil prices are available.

From CIMB

However, the same cannot be said of 2008. AirAsia has not hedged forward much of its fuel requirements in FY12/08 and onwards. In fact, AirAsia is “short” on WTI. It has sold calls at an average price of US$82.60/barrel WTI for 150,000 barrels from Jan 08 to Jun 10. Translating to English, AirAsia will realise losses if WTI stays above US$82.60/barrel from Jan 08 to Jun 10. WTI was last traded at US$98/barrel. Assuming WTI is to average at US$100/barrel from Jan 08 to Jun 10, AirAsia’s potential total losses will be RM8.9m ([US$100 – US$82.60] x RM3.40:US$1 x 150,000) that will put a 3.8% dent on FY12/08 net profit (see Table 4 for sensitivity analysis).

Now last nite AA announced its hedging half of its fuel needs.

Errr... from the news clip you posted..

BUDGET airline AirAsia Bhd has hedged half of its fuel requirement for the next six months, comprising 200 barrels at US$79.50 (RM265.53) each, in preparation for the projected fuel price hike next year.

Ahem... extremely complicated. From both CIMB and OSK write, you can see that they are SAYING that AA had sold call options at US82.60! Now their action suggest to me they are covering back their poistion at US79.50.

Err... yes... hedging is an important tool in one's business... but... sometimes... as we all know... certain companies turn this hedging into their main ace card in determining if the company makes big bucks or no. In short, some simply hedge in a reckless, gambling manner.

So as an investor, i find no advantage in a company who is hedging big time. Such hedging effort determines whether the company makes it big or not. Which means my fortunes as an investor lies on whether AA hedges it correctly. This does not sound a comfy idea to me at all.

And given the fact that Airlines is a tough industry... more budget airlines coming and an incredible volatile fuel market.. i simply find no advantage in attempting to invest in this bugger.

That's my long... 3 sen opinion.

• WTI prices may continue to ease;
• AirAsia has sold some puts that neutralise the calls it has sold. This is good for up to February 2008 only (we believe these are the 200,000 barrels in “long” positions as reported); and
• AirAsia may be able to “work out something” with the counter-parties of the calls between now and the first settlement of the trade (150,000 barrels x 6) in June 2008.

1. The rising fuel cost and that AirAsia is taking too much risks by not hedging forward enough its fuel requirements from FY12/08, instead, taking short positions in WTI;
2. Global economic slowdown on the back of the subprime mortgage woes in the US that will hurt demand for air travel (Historically, there was a strong correlation between GDP growth and demand for air travel); and
3. Tremendous pricing pressure on the back of the massive new capacity coming onstream both from full-service and budget airlines in the region over the next 1-2 years.

Attachment: Airasia.bmp (Downloaded 51 times)