UNIVERSITI KUALA LUMPUR BUSINESS SCHOOL

AIR ASIA COMPANY

INTERNATIONAL FINANCE (EEB20503)

LECTURER’S NAME :
DR MOHAMED HISHAM HANIFA

NO. NAME STUDENT ID.

1 MUHAMMAD FIRAS BIN RAZALI 62215220209
2 NUR FARADILLA BINTI ABDUL RAHIM 62215220035
3 MOHAMAD RAZIF BIN RIDZUAN 62215220333
4 ADILAH HAWA BT ZAILAN 62215220187
TABLE OF CONTENT

NO. TITLE PAGES

1. Background of the company 1

2. How the firms report the measuring and managing 2-6

their exchange rate risks.

Measuring and managing exchange rate risks

Effects of exchange rate

3. How the firm manages its foreign currency 7-9

exposure to mitigate a portion of the impact of
foreign exchange rates, with the use of hedging
program that covers the three main kinds of
exchange risks :

I) Translation
II) Transaction
III) Economic Exposure

4. Shariah point of view how exchange rate risk can 10 - 11

be mitigated for this firm.
5. Reference 12 - 13
6. Appendices 14 - 15
1.0 Background of the company

About AirAsia
AirAsia Berhad is a low-cost, Malaysian airline with headquarters near Kuala Lumpur,
Malaysia. It is Malaysia's biggest carrier, by fleet size and destinations. AirAsia Group
operates domestic and international scheduled flights to more than 165 destinations across
25 countries. AirAsia Berhad was founded by a government-owned company, DRB-HICOM,
on 20 December 1993. Though Tune Air Sdn Bhd bought AirAsia on September 8, 2001,
the airline was heavily indebted to Tune Air Sdn Bhd for a token amount of one ringgit
(approximately US$ 0.26 at the time) with debts worth US$ 11 million (MYR 40 million).
Former Time Warner executive Tony Fernandes and Kamarudin Meranun's, Tune Air Sdn
Bhd (Adam Aziz, 2020). The partners made a big shift to AirAsia and began making profit in
2002 and launching their new routes from their hub in Kuala Lumpur, gobbling up Malaysian
Airlines operator with promotional fares as low as MYR 1 (US$ 0.27). For starters, the
company has always embraced digitization. And secondly, the organization is built on
inclusivity and creating a fantastic work culture. Here’s how Fernandes has leveraged those
strengths to build a company that no one thought possible (Chan, 2019). AirAsia Berhad
opened its second hub at Senai International Airport in Johor Bahru in 2003 and launched
its first international flight to Bangkok. AirAsia offers low fare, but no frills mean that there
are no frequent flyer miles or lounges at the airport in return for low fares. Guests have the
option to pay for meals, snacks, and drinks on-flight. AirAsia Berhad also provides
purchases online or via call centres.

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2.0 How the firms report the measuring and managing their exchange rate risks.

Measuring and Managing Exchange Rate Risks

Multi-national companies (MNCs) that run businesses in different countries have to deal
with exchange rate risks. This risk can be said as unavoidable for MNCs but proper
measures can be done to reduce the impact (Picardo,2020). Being a company that runs
business activities in different countries, AirAsia Group Berhad (AirAsia) also has to face
exchange rate risks. Fluctuations of currencies between Malaysia and those countries that
AirAsia’s subsidiaries operate in is the significant factor that lead to the existence of
exchange rate risks.

Since currencies constantly fluctuate in the market, it is almost impossible to forecast

and measure the exchange rate risks. Theoretically, AirAsia faces three types of exposures
or risks which are transaction, translation and economic (explanation on page 7). Risk
Management Committee (RMC) of the company plays a crucial role in measuring and
managing all kinds of exposures including exchange rate risks (AirAsia Group Berhad,
2019). Typically, a company like AirAsia utilizes Value at Risk (VaR) method in order to
measure or forecast exposures of exchange rate (Lewis, 2019). VaR helps AirAsia by
providing the magnitude of exchange rate risks and enables the company to respond
effectively.

Apart from measuring the exchange rate risks, AirAsia’s RMC is also responsible to
come out with suitable steps to manage the risks. One of the ways to manage the exchange
rate risks taken by AirAsia is hedging. This is important to reduce the exposure of exchange
rate risks and it is based on what the company’s forecast on the future behaviour of the
exchange rate. For instance, AirAsia applies fuel hedging with the purchase forward
contracts. Fuel price is one of the key factors that influences AirAsia’s profit and oil market’s
volatility is seen as a challenge in managing the risks. Fluctuation between Malaysian
Ringgit (MYR) and United States Dollar (USD) has motivated the company to apply fuel
hedging. AirAsia has hedged 86% of its fuel requirement at USD 60.72 per barrel for the
last quarter of 2019 (Lee, 2019). This is because AirAsia forecasted that the price will be
more than hedged price as a result of appreciation of USD against MYR.

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Effects of Exchange Rate

Changes in exchange rates between AirAsia’s reporting currency (MYR) and functional
currencies which are currencies of countries where the company’s subsidiaries operate may
financially affect the company itself. The effects will be discussed in detail in terms of
several key financial figures. Figure 1.0 below shows the average annual exchange rates
between MYR and AirAsia’s functional currencies for the past 3 years.

AirAsia’s Functional Years Average Annual Exchange Rates Between MYR

Currencies and Functional Currencies
(Functional Currencies in terms of MYR)
Indonesian Rupiah (IDR) 2017 3114.4045
2018 3509.7874
2019 3413.3973
Indian Rupee (INR) 2017 15.1478
2018 16.9421
2019 16.9998
Thailand Baht (THB) 2017 0.1267
2018 0.1249
2019 0.1335
Philippine Peso (PHP) 2017 0.0854
2018 0.0766
2019 0.0800
Figure 1.0: Average Annual Exchange Rates between AirAsia’s Functional Currencies and MYR.

1. Cash Flow

The first key financial figure that can be affected by changes in exchange rates is cash
flow. This kind of risk can be identified as economic exposure as it involves with the impacts
of currency fluctuations on its cash flow (Hargrave, 2019). Essentially, the operating cash
flow from AirAsia’s subsidiaries is recorded by using the functional currencies. However,
those functional currencies have to be translated to AirAsia’s reporting currency which is
MYR. Hence, the exchange rate between MYR and each of the functional currency
determines the operating cash flow of the company. When MYR appreciates against its
functional currency, the operating cash flow received from that particular subsidiary
decreases, vice verca.

3
 Operating Cash Flow (Million MYR) AirAsia's Operating Cash Flow
2500
2154 2081
2000

1500

1000

500 353

0
2017 2018 2019
Year

Figure 2.0: AirAsia’s Operating Cash Flow

Based on Figure 2.0, the operating cash flow of AirAsia has significantly decreased
from MYR 2.154 billion in 2017 to MYR 353 million in 2018. If other factors are kept
constant, this reduction in cash flow can be said as a result of the appreciation of MYR. For
example, Figure 1.0 states that MYR appreciates against IDR (from IDR 3114.4045 / MYR
to IDR 3509.7874 / MYR) and INR (from INR 15.1478 / MYR to INR 16.9421 / MYR) in
2018. This appreciation may have reduced the operating cash flow from its subsidiaries in
Indonesia and India and resulting in a reduction in AirAsia’s overall operating cash flow from
2017 to 2018.

2. Profit Margin
Exchange rates can also adversely affect profit margin of a company. Profit margin is
the ratio of a company’s profit divided by its revenue (Amadeo, 2020). Similar to cash flow,
appreciation of MYR against any AirAsia’s functional currency will negatively impact the
profit made by AirAsia through its subsidiary. This is because when the functional currency
is translated to the appreciated MYR, the operating profit’s value decreases since it will be
worth less in MYR compared to its functional currency.

AirAsia's Operating Profit Margin

Operating Profit Margin (%)

25
22.3
20
15 11.5
10 6.1
5
0
2017 2018 2019
Year

Figure 3.0: AirAsia’s Operating Profit Margin

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 Based on Figure 3.0, AirAsia has recorded a reduction in operating profit margin for the
past 3 years. In terms of exchange rate, the appreciation of MYR from 2017 to 2018 as
stated on the previous page may have also caused the reduction of the company’s
operating profit margin from 22.3% to 11.5%. AirAsia continues suffering from loss in the
following year which is 2019 as shown in Table 3.0 where their operating profit margin
further decreases to 6.1%. One of the factors that contributes to this reduction in 2019 is
AirAsia recorded MYR 19.8 million in foreign exchange losses in second quarter of 2019
(Khalid, 2019). This shows that exchange rate may contribute to negative impacts in terms
of AirAsia’s financial performance because it may lead to lower profit margin although the
company is actually generating more profits through its subsidiaries.

3. Value of Foreign Subsidiaries

Value of AirAsia’s foreign subsidiaries may also be affected by the exchange rate
between MYR and those subsidiaries’ functional currencies. A company’s value can be
determined by its number and price of shares (Kramer, 2020). The higher the product of the
quantity and price of the shares, the higher the company is worth. This means the
behaviour of the exchange rate between MYR and other functional currencies can
determine what the subsidiary company is worth. For example, when MYR depreciates
against PHP from 2017 to 2018 as shown in figure 1.0, the parent company in Malaysia will
benefit from the foreign exchange gains. This attracts shareholders to increase their share
in Philippines AirAsia and also new investors to invest in the subsidiary company. The
increase in demand of shares will encourage the share price to increase and appreciate the
value of the subsidiary company.

4. Overall Revenue and Stock Price

Since it is proven that exchange rate can affect cash flow and profit margin, it can also
affect the overall revenue of a company. AirAsia’s overall revenue is measured by including
the revenue contributed by each of its subsidiaries. Each subsidiary will record revenue in
their own functional currency and translate the amount to MYR which is the reporting
currency since AirAsia is based in Malaysia. This is where the behaviour of the exchange
rate becomes important since it decides the overall figure of revenue for the parent
company, AirAsia. For the past 3 years, AirAsia has recorded a steady increase of overall
income as shown in the following graph.

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 Chart Title
14
Overall Revenue (Billion MYR)
11.86
12 10.64
9.71
10
8
6
4
2
0
2017 2018 2019
Year

Figure 4.0: AirAsia’s Overall Revenue

Although AirAsia recorded a steady increase in overall revenue from 2017 to 2019, it is
still acceptable to state that the behaviour of exchange rate can affect their revenue. This
impact can rarely be seen in the revenue figures as there are several other factors as well.
Moreover, while MYR appreciates against some functional currencies and create losses for
AirAsia, there is also a possibility that MYR depreciates against other functional currencies
and creating gains at the same time. For example, while MYR appreciates against IDR and
INR from 2017 to 2018 and creating losses in revenue figures from AirAsia Indonesia and
AirAsia India, MYR depreciates against THB and PHP creating foreign exchange gains at
the same time as shown in figure 1.0 This complicates the process of identifying the exact
magnitude of impacts towards the overall revenue. The real impact may be investigated if
the individual revenue of AirAsia’s subsidiaries companies and the specific exchange rate
when those currencies are translated are taken into consideration. Nonetheless, the idea
behind this is as the reporting currency appreciates against functional currencies, it will
create foreign exchange losses to AirAsia and lead to loss in overall revenue, vice versa.

In terms of stock price, it is majorly depending on the demand and supply of the stock in
stock market (Wall Street, 2018). When the demand is higher than supply, the stock price
tends to increase. As the demand is lower than what is supplied, the price is motivated to go
down. The confidence of investors and stockholders is crucial in controlling the stock price.
For AirAsia, when MYR keeps appreciating against its functional currencies, the
stockholders become less confidence that the business can provide good return for their
investment in the company. Thus, the stock of AirAsia will be less demanded in the stock
market and this motivates the stock price to decrease. In short, exchange rate has the
ability to affect the stock price by influencing the confidence of stockholders.

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3.0 Explain how the firm continuously manages its foreign currency exposure to
mitigate a portion of the impact of foreign exchange rates

Foreign currency exchange vulnerability presented to the AirAsia Company. The natural
hedges which occur when payments for foreign currency are made in line with the
receivables in the same foreign currency or, where possible, in a grouping arrangement or
settlement are administered to manage these exposures. Besides derivative products also
used besides hedging.

The method of recognizing the resulting gain or loss depends on whether the
derivative (recognized at remeasured fair value on the date a derivative contract is entered
into) is designated as a hedging instrument, and the nature of the item being hedged.

The Group did not cover USD borrowing as at 31 December 2019. 69% of US-denominated
loans have been covered by long-dated forward devises (Derivative financial instruments) in
the previous financial year. For all other factors kept steady, if RM had weakened /
repressed by 5 percent over USD as at 31 December 2019, post-tax gains should have
been more or less RM 15.1 million (2018: RM 53.0 million) for the financial year.Similarly, in
2018 as a function of USD cash flow covers.

The items listed in each of the Group's financial statements are measured by the principal
economic environment (functional currency) currency of the entity. Ringgit Malaysia, the
operating and presentation currency of the organization, presents the consolidated financial
statements. Foreign exchange exposure is a indicator of a company 's profitability, net cash
flow and market value propensity to change as currencies shift.

Hedging program that covers the three main kinds of exchange risks, i.e. Translation,
Transaction and Economic Exposure.

According to Wilkinson (2013) transaction risk is “The vulnerability of transactions to

companies engaging in international trading, as described as a form of foreign exchange
risk, occurs on every global market. Changes in exchange rates (fluctuation) threaten
affecting a contract's value in anticipation of the agreement.

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Transactions with non-controlling interest
Non-controlling interests represent a share of profit or loss and net assets in subsidiaries
which do not own the company and are presented in consolidated financial statements
separately from parent equity, separately in the AirAsia's profit or loss, and within equity.

Transactions and balances

Exchange rates at the dates of sales, or the value of the products, are used to turn foreign
currency purchases into functional currency. Foreign exchange profits and losses from the
negotiated trades and the conversion into foreign currency at the end of the year of
currency amounts of currency assets and liabilities are considered as income or loss when
the following detailed receipts are withheld as eligible cash flow hedges and net investment
hedges.

Foreign exchange profits and losses resulting from investments, liabilities and sums due in
accordance with the effects of successful hedges are reflected in the financial statements in
aggregate following net operating benefit.

Hayes (2020) mentioned translation is “The possibility of an equities, cash, liabilities or

profits of a business shifting in valuation as a consequence of adjustment in the exchange
rate (also regarded as translation risks) is that of a translation exposure.When a company
denominates a portion of its equities, assets , liabilities or income in a foreign currency, a
translation risk occurs. The exposure to translation comes from the consequences, in
particular where a organization has overseas branches, of currency movements in
condensed financial statements. It is short or long-term viewing.

AirAsia controls an entity when its participation with the company exposes or has rights
to variable returns and can affect such returns through its power in relation to the entity.
From the date on which control is transferred to the group, subsidiaries are fully
consolidated. Increases in the fair valuation of monetary assets known as investment
securities in foreign currency was analyzed between translation differences occurring from
adjustments in amortized insurance expenses and other variations in defense carriage
numbers.

For compensation or in expense, there are translation differences connected with

adjustments in amortized expenses and certain improvements in the carriage volume are
known in other detailed incomes.

8
Within income or loss as a fair value benefit or loss are recognized exchange variations
between non-monetary financial assets and liabilities such as market value equities owned
for profit or loss. Certain detailed profit is composed of translation differences on non-
monetary financial properties such as shares known as stocks.

According to Definition of economic exposure (n.d), economic exposure is the concept

of risk.To order to reduce this possibility, foreign-exchange firms develop hedging strategies
to defend their profits against currency fluctuations. It has an impact on potential cash flows
and stock prices that is long-term in nature, caused by the impact of unpredictable changes
in the currency.

This risk is minimized by environmental scans and information dissemination including

monthly reviews and responses of market profits such as the launch of low-cost promotions
in low demand periods, reallocation of the fleet, etc the maintenance of skills. To order to
resolve and raising the effect of a crisis on the company, AirAsia has formed crisis
management teams.

For the financial year ended 31 December 2019 , the Company announced a net loss of RM
283 million, with its total liabilities at 31 December 2019 increasing its current assets by RM
1.843 million. “AirAsia X (same company in Malaysia) stated that the global economical
conditions and strain facing the ringgit are expecting a demanding operating climate in
2H19"(The Malaysian Reserve,2020).

In order to offset the rising operating costs of declining ringgit from the US Dollar, it would
also boost profits and selling of allied facilities, although competition and load factors are
projected to stay at a relatively stable point.

In order to minimize the lack of fuel cover for the group , AirAsia was able to seek deferral
for aircraft operating leasing with lowered and restructured exposures to fuel hedges with
certain equivalents. The company is now seeking an potential exception or postponement of
the leases and reorganizing the existing fuel cover exposures with help the leaders and
opposition forces.

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4.0 Shariah point of view how exchange rate risk can be mitigated for this firm.

In finance, Sharia lays down investment and banking guidelines in the right manner
of Islam. In addition to the exchange risk evaluation, AirAsia Group's RMC(Risk
Management Committee) is also responsible for making effective risk management actions.
Air Asia has completely hedged its borrowing risk and is therefore not subject to any
volatility in the interest rate, with the possible rising US rates on the horizon. “The MIDF
Amanah Investment Bank Bhd, MIDF Research, found that a combination of derivatives and
natural hedges protect 71% of its dollar loans” (AirAsia taking measures to hedge unwanted
risks in fluctuating, 2015). However, the structure has still not been standardised in
accordance with conventional contracts because conventional contracts facilitate the
maximisation of profits. Shariah hedging is also unattractively priced relative to normal
hedging goods. Islamic forex emphasizes that risk should be equally shared. In general,
Islamic banks sell retail products to customers with fixed rates of murabahas.

Based on floating principles, business customers are given facilities. Current AirAsia
is a liquidity pre-payment that is amortised for the lifetime of the facility.As far as liquidity is
concerned, banks can not be consistent with Muslim debt which, compared to long-term
and floating Islamic investment, is substantially shorter (3-6 months). RHB Islamic Bank
Bhd and Bank Rakyat were two of the arrangeers of the recently established French Single
Investor Ijarah facility. Therefore, AirAsia needs tools for Islamic rate risk and FX risk
management. That is why the profit rate swap has developed and the future-oriented
Islamic FX agreement. Next, the purpose behind an Islamical profit-rate swap is essentially
the same as the goal of a traditional interest-rate swap, namely the management of interest-
rate exposure.The benefit or loss for the effective portion of variable rate borrowings in the
form of interest rate derivatives is reflected in profit or loss and is reported separately from
net operating profit.

Thus, financial institutions are designed to protect against fluctuating borrowing

rates and offer a mechanism for risk control. For example, AirAsia would hedge against
interest rates and monetary volatility through two Islamic financing instruments through the
agreement concluded with the Malaysian subsidiary of the Kuwait Finance House (KFHMB).

10
 Islamic financing will swap a fixed fluctuations rate for the 12-year loan term to the US
dollar and will also represent currencies fluctuations in the ringgit, giving the carrier financial
certitude. “The switch from Airasia Group Bhd to the decrease of its losses in land ,
equipment and plant (PPE) and foreign exchange (FOREX) has shown a decreased net
profit of RM17.94 million (second quarter) ended June 30th,2019, compared to the second
quarter ended June 30th,2019 on the 2Q18 which is RM3015.3 million” (AirAsia’s profit for
2Q19 hit by depreciation, forex losses, 2019).

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5.0 References

Adam Aziz. (2020). Fernandes, Kamarudin relinquish executive roles in AirAsia amid
corruption probe. The Edge Market. Retrieved from
https://www.theedgemarkets.com/article/fernandes-kamarudin-
relinquish-executive-roles-airasia-amid-corruption-probe

AirAsia X hit by disposal and forex losses. (2020). The Malaysian Reserve. Retrieved from
https://themalaysianreserve.com/2019/08/23/airasia-x-hit-by-disposal-and-forex-
losses/
AirAsia’s profit for 2Q19 hit by depreciation, forex losses. (2020). The Malaysian Reserve.
Retrieved from https://themalaysianreserve.com/2019/08/29/airasias-profit-for-
2q19-hit-by-depreciation-forex-losses/

AirAsia taking measures to hedge unwanted risks in fluctuating. (2015). Borneo Post.
Retrieved from https://www.theborneopost.com/2015/11/28/airasia-taking-
measures-to-hedge-unwanted-risks-in-fluctuating/

Amadeo, K. (2020). The 3 Types of Profit Margin and What They Tell You. Retrieved from
https://www.thebalance.com/profit-margin-types-calculation-3305879

Akkizidis I., Khandelwal S.K. (2008) Market Risks in Islamic Finance. Retrived from
https://www.worldcommercereview.com/publications/article_pdf/105

Chan, N. (2019). How Tony Fernandes Bought an Airline for Under $1 and Made it a
Leading Carrier. Retrieved from https://foundr.com/growth-strategies-tony-
fernandes-airasia

Definition of Economic Exposure (n.d). kantox. Retrieved from

https://www.kantox.com/en/glossary/economic-exposure-2/#:~:text=Economic
%20exposure%20is%20the%20term,on%20a%20company's%20financial
%20stability.&text=Companies%20exposed%20to%20foreign%20exchange,order
%20to%20minimise%20this%20risk.

Fin24. (2006). AirAsia turns to Islamic finance. Fin24. Retrieved from

https://www.news24.com/fin24/airasia-turns-to-islamic-finance-20060815

12
Hargrave, M. (2019). Economics Exposure. As retrieved from
https://www.investopedia.com/terms/e/economicexposure.asp

Hayes, A. (2020). Translation Exposure. Investopedia. Retrieved from

https://www.investopedia.com/terms/t/translationexposure.asp#:~:text
=Translation%20exposure%20(also%20known%20as,income%20in
%20a%20foreign%20currency.

Khalid, S. (2019). AirAsia’s profit for 2Q19 hit by depreciation, forex losses. Retrieved from
https://themalaysianreserve.com/2019/08/29/airasias-profit-for-2q19-hit-by-depreciation
-fore x-losses/

Lee, L. (2019). Malaysia’s AirAsia swings to net loss as FX fluctuations bite. Retrieved from
https://in.reuters.com/article/airasia-group-results/malaysias-airasia-swings-to-net-loss-
as-fx-fluctuations-bite-idINKBN1Y11A3

Lewis, J. (2019). Corporates makes VaR push in FX. Retrieved from

https://www.eurofinance.com/news/corporates-make-var-push-in-fx/

Picardo, E. (2020). Exchange Rate Risk. Retrieved from

https://www.investopedia.com/articles/forex/082515/how-avoid-exchange-rate-
risk.asp

Shaffail, S. (2009). No frills airline AirAsia turn to Islamic finance for aircraft financing.
Retrieved from https://islamicfinanceupdates.wordpress.com/2009/04/04/no-frills-
airline-airasia-turn-to-islamic-finance-for-aircraft-financing/

Wall Street (2018). TRADING BASICS – FACRTORS THAT INFLUENCE SHARE PRICE.
Retrieved from
https://wall-street.com/trading-basics-factors-influence-share-prices/

Wilkinson, J. (2013). Transaction Exposure Definition. The Strategic CFO. Retrieved from
https://strategiccfo.com/transaction-exposure/#:~:text=Transaction
%20exposure%2C%20defined%20as%20a,can%20also%20called
%20transaction%20risk.

6.0 Appendices

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Air Asia flights at Kuala Lumpur Internationl Airport 2 (KLIA2)

Promotions, offer, flash deals & sale campaigns by Air Asia

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Flight promotion and discount to customers

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