3786 MAS MALAYSIAN AIRLINE SYSTEM BHD
Application for Practice Note 17/2005

Malaysian Airline System Berhad (MAS)
- Application for Practice Note 17/2005
MAS wishes to announce that it has applied and been granted a conditional
waiver (Conditional Waiver) until 31 December 2009 from being categorised as an
Affected Listed Issuer under PN 17 due to its triggering of the criteria under
Paragraph 2.1 of PN 17 in relation to shareholders equity. This Conditional
Waiver is subject to four conditions imposed by Bursa Malaysia Securities
Berhad (Bursa) as stated herein below.
With an early adoption of FRS 139 and a net unrealised mark-to-market (MTM)
loss on derivative financial instruments of RM3,328 million, the Group Equity
Holders Fund as at 31 March 2009 is negative RM458 million. The net unrealised
MTM position is mainly due to fuel hedging contracts with maturity over a
3-year period up to 31 December 2011. The unrealised fuel MTM position will
fluctuate subject to the movement in the fuel forward curve.
The Board has approved the early adoption of FRS 139 to allow MAS financial
statements to be directly comparable to most major international airlines and
to improve transparency of the financial statements.
MAS adopts a competitive fuel hedging policy, whereby it strives to have
similar fuel cost with its peer competitors. MAS gradually built its hedging
portfolio throughout the year. Due to the unprecedented collapse in fuel prices
in late 2008 and early 2009, these contracts are in MTM loss position. These
are unrealised losses as the fuel hedging contracts will mature over a 3-year
period up to 31 December 2001. The unrealised MTM position will fluctuate based
on the movement in the fuel forward curve. As at 31 March 2009, the unrealised
fuel MTM loss is RM3,383 million. On a comparable basis, using fuel forward
curve as at 29 May 2009, the unrealised fuel MTM loss has reduced by RM1,150
million. The total fuel volume hedged as at 8 June 2009 is 21.9 million barrels
for the periods up to 31 December 2011. As of 31 March 2009, MAS has hedged 47%
of its fuel requirement at USD103 per barrel for the rest of 2009. The average
hedged fuel prices for 2010 and 2011 range from USD90 per barrel to USD100 per
barrel.

Due to the unrealised net MTM losses, the Group Equity Holders Fund is
unfavourably impacted. As at 31 March 2009, on FRS 139 basis, the Group Equity
Holders Fund technically triggers the criteria under Paragraph 2.1 of PN 17 in
relation to shareholders equity. A significant portion of the negative equity
as at 31 March 2009 (on FRS 139 basis) is due to the unrealised net MTM
position (RM3,328 million).
Notwithstanding the voluntary early adoption of the new accounting standard and
the net unrealised MTM position, the Group's operations remain robust and the
'going concern' assumption remains valid.
In approving the early adoption of FRS139, the Board has also noted and
considered the following:
i) the Group's cash balance remains strong, at RM3.77 billion as at 31 March
2009 including negotiable instrument of deposits;
ii) on non-FRS139 basis, the Group Equity Holders Fund will be at RM3,396
million as at 31 March 2009; and
iii) on FRS139 basis and using comparable fuel forward curve as at 29 May
2009, the Group Proforma Equity Holders Fund would have been RM692 million as
at 31 March 2009.
The reduction in the Group Equity Holders Fund does not trigger any default or
cross default of its financial facilities.
As part of the plan to improve its equity, MAS plans to gradually lock in the
MTM gain when the opportunity arises (fuel forward curve moves upward) and
deliver underlying operating profit. On the underlying performance, MAS
continues to fast track the implementation of its Business Transformation Plan
(BTP 2), anchored on the 4-pillar strategy of dynamic pricing, network
optimisation, cost management and innovation. The Board of MAS is committed to
these ongoing measures and strategies to cease or avoid triggering the PN17
criteria by 31st December 2009.
As part of MAS enhancement in its risk management practices in relation to its
fuel hedging policy, MAS will continue to selectively buy put options which
will reduce the existing fuel hedging downside exposure. This will provide
certain protection with respect to unrealised MTM exposure in the event the
fuel price moves downward.
In granting MAS the Conditional Waiver from PN 17, Bursa has set the following
conditions:
Condition 1: The Conditional Waiver is only in respect of unrealised MTM losses
for fuel hedging contracts arising from the adoption of FRS 139. If MAS
triggers the PN 17 criteria due to reasons other than the above (e.g. realised
losses from hedging contracts), the above Conditional Waiver will not apply;
Condition 2: MAS must ensure full compliance with FRS 139 in recognising and
measuring all the financial assets, financial liabilities and certain contracts
to buy or sell non-financial items as stipulated in FRS 139 in all its
financial statements issued in the financial year 2009;
Condition 3: MAS is to take all necessary measures to cease or avoid triggering
the PN 17 criteria by 31 December 2009. In the event that the Company triggers
or continues to trigger the PN 17 criteria after the expiry of the Conditional
Waiver (i.e. 31 December 2009), MAS will be required to fully comply with PN 17
requirements;
Condition 4: MAS must take the following disclosures in its quarterly
report(s):
i) a Proforma balance sheet position in its quarterly report (QR) ended 31
March 2009, showing shareholders equity based on MTM valuation of the fuel
hedging contracts as at 29 May 2009 under the FRS 139 reporting principles;
ii) a Proforma balance sheet position without FRS 139 in all its QRs for
financial year 2009;
iii) total realised and unrealised losses due to fuel hedging contracts under
FRS 139 for financial year to-date in all its QRs for financial year 2009; and
iv) the status of the measures as referred to in Condition 3 above in all its
QRs for financial year 2009.
The Conditional Waiver granted by Bursa was after taking into consideration of,
amongst others, the following factors:
i) high volatility of the underlying assets (i.e. fuel) hedged by MAS which is
subject to MTM valuation giving rise to fluctuations in the Group Equity
Holders Fund. In this regard, it is noted that the Group Equity Holders Fund
was negative for the quarter ended 31 March 2009 based on the pricing of fuel
price at the material period but positive based on the comparative fuel forward
curve as at 29 May 2009; and
ii) the MTM losses of the Groups fuel hedging contracts are unrealised losses.



12/06/2009 07:24 PM