Dissecting AirAsia's Earnings 2008 (Part 1)

As pointed out in my older posts, AirAsia's reported earnings need some adjustment before the numbers can be used to gauge its performance.

To dissect AirAsia's 2008 earnings, let's begin with the reported numbers in its Income Statement:

• Profit before tax (PBT) : RM -869 million
• Profit after tax( PAT) : RM -497 million
• Earning per share: -21.1 sen

We start our analysis using PBT to eliminate the effect of deferred tax. First adjustment we had to do is taking out the non-operating gain/loss from the reported income. They are:

• unwinding derivatives (interest-rate swaps): RM -152 million
• unwinding derivatives (fuel hedging contract): RM -678 million
• foreign exchange movement on borrowings: RM -235 miilion

After our first adjustment, the profit of AirAsia in 2008 is RM196 million, which is equivalent to 8.2 sen per share. Not bad so far...

But I would like to discuss further about the validity of the adjustments done. Those 3 items are excluded because they are thought to be non-recurring in nature. But are they really so?

In my opinion, the FX movement is quite volatile and the trend is difficult to predict, thus its short-term movement can be considered as non-recurring. But fuel-hedging is a different case. Every airlines in the world will more or less hedge their fuel consumption. AirAsia's current position without any hedge is just a short term bet on the movement of oil prices. Sooner or later, it will resume oil-hedging activities.

So, the unwinding decission taken by AirAsia last year, is like charging all the future loss into one year. This action will make its 2008 earning worse, at the same time inflate its future reported income (less loss from hedging).

I suggest that we charge a portion of the unwinding loss back into AirAsia's income.

According to its quarterly report (Sep-2008), the original intention of AirAsia when entering these contracts is to hedge its fuel cost in the remaining period of 2008 and year 2009. Lacking of any detail information, I think the unwinding loss of these contracts (RM 678million) should be spread evenly over the five quarters starting Q4-2008. As a result, a loss of RM136million (= 20% x RM678million) should be charged into each of these quarters to bring down the inflated earning.

As a result, AirAsia's adjusted earning in 2008 will become RM 60 million, or 2.5 sen per share.

.