Rising jet fuel price woes

Malaysia Airlines aircraft ready to take off at KLIA in SepangMOHD SAHAR MISNI/The Star

IT’S certainly a big deal for Malaysia Airlines Bhd (MAS) to report higher losses of RM812mil for its financial year 2017. This compares with the RM439mil loss recorded in 2016 and the whopping RM1.13bil loss in 2015.

Despite this, its chief executive officer Izham Ismail remains confident that the airline can break even next year.

Given the fact that the airline is no longer a public-listed company, it is difficult to ascertain why MAS suffered such huge losses in 2017, although forex and oil prices could have been factors.

How it is going to make more money to be profitable and where it is headed next remain to be seen. One thing is clear, its focus is on increasing yields and obtaining higher loads.

It has been four years since MAS’ parent, Khazanah Nasional Bhd, came up with a turnaround plan for the airline to become profitable again. The target was for MAS to be profitable by the end of 2017, but instead, the airline is still in the red.

Now, MAS hopes to break even by end-2019 and become profitable by 2020, and to possibly seek a re-listing on Bursa Malaysia beyond that.

So, the timeline to profitability has changed from end-2017 to end-2019 now. Both Izham and his management team should be fully aware that Malaysian taxpayers will no longer be sympathetic if the airline continues to remain in the red and fails to fulfil its promise of securing sustainable profitability by 2020.

On the back of such a scenario, MAS is again facing rising oil prices besides the continued stiff competition and currency volatility. The airline’s dilemma in terms of flight cancellations and aircraft issues must also be sorted out quickly, as these issues would force cost to increase amid a rising oil price environment.

The Brent crude oil has touched US$80 a barrel, but airline jet fuel was traded at RM91.19 a barrel last week. At US$80 a barrel, the airline can still absorb the cost, but should it get higher, then it will be most challenging.

The good thing is that MAS is said to have hedged about 78% of its jet fuel needs at US$70 per barrel for 2018.

Hopefully, it has done enough hedging for 2019, as MAS aims to break even then, but a higher oil bill could also wreck its plans.

Rival AirAsia Group’s boss Tan Sri Tony Fernandes believes a higher oil price environment is a “great opportunity” for his group to build market share, and says he is going to use volume and data to drive revenue and cut costs.

What would MAS’ Izham use to fight the odds and let MAS shine again?

The odds include advances by parties that believe they are better at piloting the airline when they don’t even have the money or expertise to do so, but are keen to take over the airline.

Morgan Stanley intrigue in Media Prima  

THE sale of prime properties owned by Media Prima Bhd to Permodalan Nasional Bhd (PNB) may not be an easy affair.

The properties – located in Bangsar and Shah Alam – are about the most valuable assets owned by the media company. Hence if the assets are sold, it will leave the media company less valuable.

Umno is the single largest shareholder in Media Prima with over 19% interest. The block of shares owned by the political party itself is not a controlling stake. However the political clout of Umno gives it the inherent control over Media Prima despite its minority stake.

This is because the regulations restrict the publications of newspapers. However, under the new government, the restrictions may be lifted. It is a subject that has been talked about by the new government as part of measures to de-politicise the media.

Technically, under the weight of such speculation, newspaper companies should lose their value. Funds should start disposing their stake and not accumulate shares in companies such as Media Prima.

However that does not seem to be the case.

Morgan Stanley & Co International Plc, a financial services group based in the UK has been buying shares in Media Prima. It now has 12.72% of Media Prima and is still buying.

The Employees Provident Fund has 11.8% while other funds own smaller blocks of shares that cumulatively come up to about 35%.

Almost all of the money from the proceeds of the land sale, amounting to RM280mil, has been earmarked to settle borrowings. So shareholders cannot expect any bumper dividends unless the operations of the company improve. However the industry is going through a tough time and Media Prima’s operations are also affected.

Under such circumstances, why would a fund like Morgan Stanley accumulate a substantial stake in Media Prime? Who are the individuals behind Morgan Stanley?

El Nino making comeback?

APPARENTLY, the dry weather phenomenon El Nino is making a comeback.

Despite the good rainfall currently, the World Meteorological Organisation and the National Oceanic and Atmospheric Administration have pegged the chances for an El Nino occurance at 60%-70% by the end of the year.

If an El Nino develops, it could lead to severe drought, which would badly disrupt the fresh fruit bunch yields in the oil palm estates, as well as palm oil supply in the region. Malaysia posted the largest drop in crude palm oil (CPO) production during the strong El Nino events back in 1982-1983 and 1997-1998.

However, weather forecasters expect that the impact of the emerging El Nino will not be as intense this time around, as its recurrence is so close to the previous super El Nino back in 2015-2016. Futhermore, most oil palm regions in Malaysia and Indonesia are still enjoying good rainfall. For planters, the likely impact in terms of lower yields in their estates from an El Nino occurrence by year-end can only be felt from the second half of 2019 onwards.

But one good thing from the prolonged dry weather in the previous El Nino episodes is that historically, it tends to trigger CPO prices to be traded higher. Back in 2009-2010, the El Nino phenomenon saw CPO prices swinging between the RM2,500 and RM3,000-per-tonne range.

Hence, a potential occurance of an emerging El Nino by year-end will certainly be a big boost to local planters. Of late, many planters have been struggling with high palm oil stocks, high cost of production and weak CPO prices.

The CPO price is barely trading above RM2,200 per tonne, while the latest end-August palm oil stocks are at a one-year high of 2.49 million tonnes.

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