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AIRLINE INDUSTRY

AIRLINE INDUSTRY. Stan Li, Jessica Liu, Ben Mui, Edison Pei, Tony Yeung. Airlines. Provide air transport services for passengers or freight’ Categories of airline services include: International National Regional Domestic. Major Issues. Weather

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AIRLINE INDUSTRY

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  1. AIRLINE INDUSTRY Stan Li, Jessica Liu, Ben Mui, Edison Pei, Tony Yeung

  2. Airlines • Provide air transport services for passengers or freight’ • Categories of airline services include: • International • National • Regional • Domestic

  3. Major Issues • Weather • Fuel Cost -14-16% of an airline's total costs • Labor - 40% of an airline's expenses • Other • Airport capacity, route structures, technology, and costs to lease or buy the physical aircraft

  4. Pressures from External Forces • Threat of new entrants • Power of suppliers • Power of buyers • Availability of substitutes • Competitive rivalry

  5. Key Success Factor • Attracting customers • Managing its fleet • Managing its people • Managing its finances

  6. Industry Profit Pattern • Cyclical industry • Four or five years of poor performance precede five or six years of improved performance. • Mature industry  consolidation trend

  7. Government Regulations • Government has extensive regulation for economic, political, and safety concerns • Some countries (e.g. US and Australia) have "deregulated" their airlines. • The entry barriers for new airlines are lower in a deregulated market, • far greater competition • average fares tend to drop 20% or more.

  8. International Regulation • Groups (e.g. International Civil Aviation Organization) establish worldwide standards for safety and other vital concerns. • Most international air traffic is regulated by bilateral agreements between countries. • Bilateral agreements are based on the "freedoms of the air“ • In the 1990s, "open skies" agreements became more common

  9. Major Risks Faced by Airlines • Strategic risk • Business design choices • Financial risk • Variability of revenue and costs • Operational risk • Tactical aspects of running the business • Hazard risk • Safety of physical assets

  10. Risk Events Causing Stock Drops 1991-2001 Source: Mercer analysis

  11. Singapore Airline

  12. Background • Public company since 1972 in Singapore Stock Exchange • Wholly-owned subsidiary of the Singapore government through Temasek Hldgs (Pte) • Its expanding route network covers 110 cities in 42 countries now. • Having the fastest and youngest growing fleets.

  13. Coverage

  14. Competitive Advantage - Fleet Age Comparison

  15. Decreased but Strong Profitability

  16. Singapore Airline Company Structure • Subsidiaries: SilkAir, Tradewinds Tour and Travel, SIA Engineering Company, SIA Cargo, and SATS • All the companies are in closely related business • SIA accounts for about 75% of the total revenue

  17. Consolidated Income Statement

  18. Stock Information

  19. 5-year Stock Price Trend

  20. List of Major Shareholders

  21. Employee Stock Option (cont) At the end of the financial year, options to take up 79,196,566 unissued shares in the Company were outstanding, which is 6% of the total share outstanding.

  22. Financial Risk • Market Risk • Jet fuel price risk • Foreign currency risk • Interest rate risk • Market price risk • Counterparty risk • Liquidity risk • Other possible risk

  23. Jet Fuel Price Risk

  24. Jet Fuel Price Risk (cont) • A change in price of US$0.01 per American gallon of jet fuel affects the Group’s annual fuel costs by US$14.7 million Jet fuel price risk management • Swaps and options contracts hedged up to 24 months forward • The group has a 55% jet fuel hedge ratio at $81 per barrel.

  25. Jet Fuel Price Risk (cont.) • FY2006 operating profit = $1.213B • FY2005 operating profit = $1.317B • Dropped $105 million (-7.9%) • Mainly due to rise in higher jet fuel price • From this, one can see the profitability of the group lies mainly on the hedge strategy

  26. Jet Fuel Price Risk (cont) • Hedge by Mean of Platts Singapore (MOPS) • As of March 31st 2006, the MOPS price USD $79.54 • Annualized volatility 2005-06 = 26.36% • Risk free rate = 2.4%

  27. Jet Fuel Price Risk (cont) • On 26 April 2006, the Company announced an increase of the fuel surcharge on tickets sold from 15 May 2006 • The adjustments will offer partial relief of higher operating costs arising from persistently high price of jet fuel hovering at US$90 per barrel, as compared to US$80 per barrel when the surcharge was last revised in September 2005.

  28. Jet Fuel Price Risk (cont) • Net fair value gain of $82.2m

  29. Foreign Currency Risk • Foreign currency accounts for 65% of total revenue (2004-05: 68%) and 69% of total operating expenses (2004-05: 64%) • The Group’s largest exposures are from USD, Euro, UK Sterling Pound, Swiss Franc, Australian Dollar, New Zealand Dollar, Japanese Yen, Indian Rupee, Hong Kong Dollar, Chinese Yuan, Korean Won and Malaysian Ringgit. • The Group generates a surplus in all of these currencies, with the exception of USD. • The deficit in USD is attributable to capital expenditure, fuel costs and aircraft leasing costs – all conventionally denominated and payable in USD.

  30. Foreign Currency Risk Management • The Group manages its foreign exchange exposure by a policy of matching, as far as possible, receipts and payments in each individual currency. • The Group also uses forward foreign currency contracts to hedge a portion of its future foreign exchange exposure. • Such contracts provide for the group to sell currencies at predetermined forward rates, with settlement dates that range from one month up to one year. • The Group uses forward contracts purely as a hedging tool.

  31. Interest Rate Risk • Interest rate risk • Changes in interest rates impact interest income and expense from short-term deposits and other interest-bearing financial assets and liabilities

  32. Interest Rate Risk (cont) • Long-Term liabilities • The company’s finance lease commitments are charged at a margin above the LIBOR. These ranged from 3.19% to 5.18% (2004-05: 1.56% to 2.31%) per annum. • SIA Cargo’s finance lease commitments are charged at a margin above the LIBOR. These ranged from 2.88% to 4.74% (2004-05: 1.15% to 2.65%) per annum.

  33. Interest Rate Risk (cont) • Long-Term Assets • Non-equity investments of $382.4 million (2005: $389.8 million) for the Group and the Company relate to interest-bearing investments with an effective annual interest rate of 3.97% (2004-05: 1.71%). • During the financial year, the Group and the Company recorded an impairment loss in the profit and loss account of$1.0 million (2004-05: $0.1 million) pertaining to unquoted equity investments. • The Group’s loan receivable within one year of $42.0 million is unsecured and bears interest between 3.19% to 5.05% (2004-05: 1.56% to 3.19%) per annum.

  34. Interest Rate Risk (cont) • As at 31 March 2006, the composition of cash and bank balances held in foreign currencies by the Group is as follows: USD – 21.8% (2005: 21.7%), EUR – 13.6% (2005: 21.1%) and JPY – 13.2% (2005: 13.3%). • Cash at bank earns interest at floating rates based on daily bank deposit rates ranging from 1.38% to 4.71% (2004-05: 0.28% to 2.20%) per annum. • Short-term deposits are made for varying periods of between one day and three months depending on the immediate cash requirements of the Group, • earn interests at the short-term deposit rates. The weighted average effective interest rate of short-term deposits is 3.6% (2004-05: 2.5%) per annum.

  35. Market Price Risk • Potential loss resulting from a decrease in market prices • Such as lower airfares • The Group owned $412.2 million (2005: $41.6 million) in quoted equity and non-equity investments at 31 March 2006.

  36. Counterparty Risk • Surplus funds are invested in interest-bearing bank deposits and other high quality short-term liquid investments. • Counterparty risks are managed by limiting aggregated exposure on all outstanding financial instruments to any counterparty, taking into account its credit rating. Such counterparty exposures are regularly reviewed, and adjusted necessary. • This mitigates the risk of material loss arising in the event of non-performance by counterparties.

  37. Liquidity Risk • At 31 March 2006, the Group had cash and short-term deposits amounting to $3,151.6 million (2005: $2,840.2 million). In addition, the Group had available short-term credit facilities of about $1,449.1 million (2005: $1,417.1 million). • The Group also has Medium Term Note Programmes under which it may issue notes up to $1,500 million (2005: $1,500 million). • Under these Programmes, notes issued by the Company may have maturities as may be agreed with the relevant financial institutions, and notes issued by one of its subsidiary companies may have maturities between one month and ten years.

  38. Liquidity Risk Management • The Group’s holdings of cash and short-term deposits are expected to be sufficient to cover the cost of all firm aircraft deliveries due in the next financial year. • any shortfall would be met by bank borrowings or public market funding. • Due to the necessity to plan aircraft orders well in advance of delivery • it is not economical for the Group to have committed funding in place at present for all outstanding orders. • The Group’s policies in this regard are in line with the funding policies of other major airlines.

  39. Other Possible Risks • Risk management committee’s of the different subsidiaries and associated companies create the ability to react to unforeseen events such as • 9-11 • SARS • Iraq war • Bali bombing

  40. Risk Management Governance

  41. Statement on Risk Management • 1) Enhancement to Risk Framework • Intro of strategic risks framework • Identify and report strategic risks and other long-term issues for senior management attention. • Review of Risks to Singapore Airlines Reputation • Review of Regulatory Compliance

  42. Statement on Risk Management • 2) Simulations and Tests of Risk Control • Conducted throughout the year to test the effectiveness of risk controls and handling of business continuity • The exercise tested recall responses, communications systems, functional preparedness and management decision-making under simulated “crisis scenarios”.

  43. Statement on Risk Management • 3) Other Risk Process and Program • Annual Risk Management Review • Whistle Blowing Program • All “wrong-doings” can be reported and investigate to an independent investigation unit • “Wrong-doings” can include fraud, theft, abuse of authority, breach of regulations or non-compliance with corporate policy such as improper banking or financial transactions. • Banking Transaction Procedures • Lenders to Singapore Airlines must be properly authorized • All group companies/divisions has its own approved limits and procedures that must be followed

  44. Statement on Risk Management • Board of directors after reviewing the risk management practices and activities of Singapore Airlines has not found anything to suggest that risks are not being satisfactory managed.

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