The Air Mauritius board of directors met in the presence of its financial and legal advisors to review the current state of affairs of the airline yesterday. Top of the agenda was the slowing of demand and the crippling fuel hedging agreements currently in place. Based on unaudited figures, the airline has realised a net loss of EUR20.5m on its hedging contracts during the nine months ending December 31, 2008. Unrealised losses (mark-to-market) as at December 31, 2008 on unexpired hedge contracts maturing up to August 2010 stood at EUR129.5m.
A feature of hedging agreements is that collateral, usually in the form of cash, needs to be deposited with the hedge counterparties when losses on the contracts exceed a set level. All airlines are of course required to account for losses arising not only on the volumes contracted for the year, but also losses expected to arise on volumes contracted for future years, if the fuel spot price is lower than the contracted price under a hedging agreement. These are in accounting terms referred to as contingent losses from mark-to-market operations.
Air Mauritius has now been forced to appoint hedge specialists to develop risk-reducing strategies and restructure the hedge portfolio accordingly. However, this is a complex operation and it is too early to determine any potential benefits that may be realised, especially in this current market. Air Mauritius has hedged directly with financial institutions. As of today, these counterparties for fuel hedging are Barclays Capital, BNP, Mitsui and Morgan Stanley.
Air Mauritius has had to issue collaterals totaling EUR117.9m in various forms including cash, letters of credit and government guarantee. To ease pressure on the company's cash flow, the Mauritius government has pledged guarantees to the tune of $110m (EUR78.5m) of which the equivalent of EUR60.7m has been utilised. Depending on future fuel price movements the actual hedging loss could be higher or lower than the projected unrealised hedging loss. At current oil prices, Air Mauritius expects the current collaterals in place to be sufficient to meet the company's liabilities, except for an equivalent amount of EUR18m, a facility that it is currently renegotiating; and that cash resources must be available to meet the commitments of the company as hedge contracts mature and losses must be settled in cash. The current collateral in place could also be affected by a decline in demand for travel and cargo, it is this factor which will tell during 2009 and will hurt Air Mauritius and others in the same situation.
Indeed, the third quarter results of Air Mauritius were impacted by declines in demand for travel and cargo resulting in lower revenue to the order of EUR6.4m compared to the same period last year. For the financial year ending March 31, 2009, the company is expecting a revenue shortfall of EUR26.3m compared to corresponding figures of the last financial year. So estimated results for Air Mauritius as at December 31, 2008 and forecasts going to March 31, 2009 on the basis that unrealised hedging losses would be recognised through the Hedge Equity Reserve Account - the impact of the afore mentioned factors has resulted in estimated losses of EUR18m at the end of December 2008 (2007 saw a profit of EUR11.6m) and projected losses of EUR23.1 m at the end of March 2009 (2008 saw a profit of EUR15.6m).
Air Mauritius has resolved that the total funding needs of the company are estimated at EUR65m and are expected to be met principally from the realisation of non-core assets and bridging finance, together with a call for fresh capital. The injection of fresh capital will consolidate the company's equity base in the interest of all its stakeholders. The board has resolved to recommend accordingly. Air Mauritius is currently reviewing its network in the light of current reduced demand, relying on agreements with the likes of Air France-KLM to take on more code sharing. Therefore the new operating plan has implications on fleet and other resources including human resources. It is thought that some members of the board will step down during 2009 as redundancies are announced.
Of course all these actions and variables are well and good - the real problems will start though if oil were to fall below $30 a barrel and/or if the Euro were to depreciate against the US Dollar - a distinct possibility at this time. If either of these events occur during the next few months then all bets are off for Air Mauritius and they will have to entertain the possibility of a worst case scenario of deep cuts to fleet and staff levels.
If you think that this is a scenario limited to Air Mauritius then think again. Weak demand is now a given, oil prices, debt levels and currency fluctuation hold all the keys for the future and they are very hard to plan for or predict. Many companies are indeed in the lap of the gods during 2009!
A feature of hedging agreements is that collateral, usually in the form of cash, needs to be deposited with the hedge counterparties when losses on the contracts exceed a set level. All airlines are of course required to account for losses arising not only on the volumes contracted for the year, but also losses expected to arise on volumes contracted for future years, if the fuel spot price is lower than the contracted price under a hedging agreement. These are in accounting terms referred to as contingent losses from mark-to-market operations.
Air Mauritius has now been forced to appoint hedge specialists to develop risk-reducing strategies and restructure the hedge portfolio accordingly. However, this is a complex operation and it is too early to determine any potential benefits that may be realised, especially in this current market. Air Mauritius has hedged directly with financial institutions. As of today, these counterparties for fuel hedging are Barclays Capital, BNP, Mitsui and Morgan Stanley.
Air Mauritius has had to issue collaterals totaling EUR117.9m in various forms including cash, letters of credit and government guarantee. To ease pressure on the company's cash flow, the Mauritius government has pledged guarantees to the tune of $110m (EUR78.5m) of which the equivalent of EUR60.7m has been utilised. Depending on future fuel price movements the actual hedging loss could be higher or lower than the projected unrealised hedging loss. At current oil prices, Air Mauritius expects the current collaterals in place to be sufficient to meet the company's liabilities, except for an equivalent amount of EUR18m, a facility that it is currently renegotiating; and that cash resources must be available to meet the commitments of the company as hedge contracts mature and losses must be settled in cash. The current collateral in place could also be affected by a decline in demand for travel and cargo, it is this factor which will tell during 2009 and will hurt Air Mauritius and others in the same situation.
Indeed, the third quarter results of Air Mauritius were impacted by declines in demand for travel and cargo resulting in lower revenue to the order of EUR6.4m compared to the same period last year. For the financial year ending March 31, 2009, the company is expecting a revenue shortfall of EUR26.3m compared to corresponding figures of the last financial year. So estimated results for Air Mauritius as at December 31, 2008 and forecasts going to March 31, 2009 on the basis that unrealised hedging losses would be recognised through the Hedge Equity Reserve Account - the impact of the afore mentioned factors has resulted in estimated losses of EUR18m at the end of December 2008 (2007 saw a profit of EUR11.6m) and projected losses of EUR23.1 m at the end of March 2009 (2008 saw a profit of EUR15.6m).
Air Mauritius has resolved that the total funding needs of the company are estimated at EUR65m and are expected to be met principally from the realisation of non-core assets and bridging finance, together with a call for fresh capital. The injection of fresh capital will consolidate the company's equity base in the interest of all its stakeholders. The board has resolved to recommend accordingly. Air Mauritius is currently reviewing its network in the light of current reduced demand, relying on agreements with the likes of Air France-KLM to take on more code sharing. Therefore the new operating plan has implications on fleet and other resources including human resources. It is thought that some members of the board will step down during 2009 as redundancies are announced.
Of course all these actions and variables are well and good - the real problems will start though if oil were to fall below $30 a barrel and/or if the Euro were to depreciate against the US Dollar - a distinct possibility at this time. If either of these events occur during the next few months then all bets are off for Air Mauritius and they will have to entertain the possibility of a worst case scenario of deep cuts to fleet and staff levels.
If you think that this is a scenario limited to Air Mauritius then think again. Weak demand is now a given, oil prices, debt levels and currency fluctuation hold all the keys for the future and they are very hard to plan for or predict. Many companies are indeed in the lap of the gods during 2009!
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