I like your entrepreneurial spirit and your business acumen. If you look at my posting on AirAsia a few days back, I like the stock despite the popular trend to sell airlines. You have managed to steer brilliantly during even harder times such as during the SARs and the tsunami - which hit air travel business a lot worse than now.
The aim of this open letter is to ask you to PLEASE STOP ACTING LIKE A FUEL OIL TRADER. You are in the business of running a LCC. One can try to be too smart by timing and trading fuel price, especially since it has been so volatile.
Why You Should Stop Being An Oil Trader:
a) If you bet wrongly, it affects the prospects and valuations of AirAsia.
b) If you get the timing well, save the company a lot of money, it WON'T be applauded by analysts or investors because these are "one-offs".
The jumps in earnings due to slick timing of fuel price will not result in better valuation. In fact analysts will use that fact to downgrade the stock to a discount to other LCCs and major carriers as it remains an uncertainty.
Currently, AirAsia has hedged 30% of its fuel requirements for 1H08. You have wisely covered the liability from the call options up to 3Q09. What must stop is the way AirAsia communicates its hedging strategy: e.g. "the cost of ofsetting the call options was wholly covered by the income from writing various puts".
Still, on the bright side, even if the price of oil goes to US$170, AirAsia should still be profitable - a fact which escapes 99% of the sellers currently.
Singapore Airlines start hedging today for 18 months in the future. Whatever the date in the future is, they will build up 50% cover and they will do it with fairly traditional hedging mechanisms.Cathay Pacific's method as more convoluted. They have put in place a complex structure of swaps, options and three-way options [selling put, buying call and selling another call with a higher strike price]. And that gives them a degree of protection. They are hedged about 30% for 2008 volumes. The head of commodities at one global investment bank names Qantas, All Nippon Airways and Japan Airlines as committed fuel hedgers. Malaysia Airlines, meanwhile, has a conservative policy of benchmarking its fuel hedging ratio against the average hedge ratio of regional airline peers. AirAsia takes a more directional bet as part of its hedging policy.
Yes, AirAsia is not alone in they way it hedges fuel oil. The harder it is, the more convoluted it is to understand, the worse it will be for investors to rate the stock properly. The more conservative it is, you will then take the fuel oil out of the equation. You have a solid business model, solidified by having your own LCC terminal - don't put so many variables into the equation. Final analysis- make it a conservative hedge policy, make it known to all, make it easy to understand and calculate, be transparent, don't make people guess or hope n' pray. You are not paid to make money on fuel price, you are not supposed to and people don't expect you to (even when you own the company).
p/s photos: Han Chae Young & Cherie Ying Choi Yee
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