UPDATE 2-MAS posts Q1 loss, takes fuel hedging hit

* Q1 net loss 695 mln ringgit, using new accounting rules

* 3.8 bln ringgit charge due to valuation of fuel hedges

* Potential 1.1 bln ringgit Q2 fuel hedge gain

(Adds company statement on negative equity position)

By Soo Ai Peng

KUALA LUMPUR, June 12 (Reuters) - Malaysian Airline System (MASM.KL) posted its first quarterly loss in two-and-half years on Friday, with overcapacity, volatile fuel prices and a global downturn pushing it towards insolvency.

Malaysia's national carrier said it had recognised fuel hedges under new accounting rules to reflect their market value and took a charge to its balance sheet of 3.8 billion ringgit ($1.1 billion) effective Jan. 1, 2009.

The mark-to-market charge makes MAS' group equity holders fund negative 458 million ringgit, effectively making it an insolvent company, analysts said.

"This means that MAS is theoretically insolvent," Raymond Yap, an analyst at CIMB investment bank said. "In reality however, MAS still has 0.95 ringgit net cash per share."

Stock exchange regulator, Bursa Malaysia, has granted the airline a conditional waiver from being categorised as an "affected" company and asked it to take all necessary measures to correct its negative shareholders' position by year end.

The airline said it could see a 1.1 billion ringgit gain on fuel hedging if oil prices average $66 a barrel in the second quarter.

But analysts predict competition will intensify amid weak demand and fresh capacity coming on stream from full-service and budget airlines in the region.

Singapore Airlines (SIAL.SI), the world's largest carrier by market value, last month reported a sharp drop in its quarterly net profit, hit by fuel hedging losses and a weak travel market, and also warned that the H1N1 flu outbreak could delay a recovery in air travel. [ID:nSIN451871]

The International Air Transport Association said on Monday the global airline industry faces an unprecedented crisis and is likely to lose $9 billion this year, nearly double an estimate made just three months ago. [ID:nSP478955]

MAS reported a January-March net loss of 695 million ringgit ($198.5 million) versus a year-earlier profit of 120 million ringgit. It said it had a first-quarter fuel hedging loss of 557 million ringgit, and an operational loss of 138 million ringgit.

"This is the first operational loss for Malaysia Airlines since the third quarter of 2006 as it faced a triple squeeze; overcapacity, extreme fuel volatility and a global slump which hit passenger and cargo demand," the airline said in a statement.