Air New Zealand 2013 Annual Report Download - page 30

Air New Zealand Annual Financial Results 
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. FINANCIAL RISK MANAGEMENT
Air New Zealand is subject to credit, foreign currency, interest rate, fuel and equity price risks. These risks are managed with various financial
instruments, using a set of policies approved by the Board of Directors. Compliance with these policies is reviewed and reported monthly
to the Board and is included as part of the internal audit programme. Group policy is not to enter, issue or hold financial instruments for
speculative purposes.
CREDIT RISK
Credit risk is the potential loss from a transaction in the event of default by a counterparty during the term of the transaction or on
selement of the transaction. Air New Zealand incurs credit risk in respect of trade receivable transactions and other financial instruments
in the normal course of business. The maximum exposure to credit risk is represented by the carrying value of financial assets.
Air New Zealand places cash, short term deposits and derivative financial instruments with good credit quality counterparties, having a
minimum Standard and Poors credit rating of A. Limits are placed on the exposure to any one financial institution.
Credit evaluations are performed on all customers requiring direct credit. Air New Zealand is not exposed to any concentrations of credit
risk within receivables, other assets and derivatives. Air New Zealand does not require collateral or other security to support financial
instruments with credit risk. A significant proportion of receivables are seled through the International Aviation Travel Association (IATA)
clearing mechanism which undertakes its own credit review of members.
MARKET RISK
Foreign currency risk
Foreign currency risk is the risk of loss to Air New Zealand arising from adverse fluctuations in exchange rates.
Air New Zealand has exposure to foreign exchange risk as a result of transactions denominated in foreign currencies, arising from normal
trading activities, foreign currency borrowings and foreign currency capital commitments and sales.
Air New Zealand has a formal foreign exchange management policy (approved by the Board of Directors) to enter into foreign exchange
contracts to manage economic exposure to fluctuations in foreign exchange rates impacting operating cash flows, capital expenditure and
foreign currency denominated liabilities. Any exposure to gains or losses on these contracts is offset by a related loss or gain on the item
being hedged.
Foreign currency operating cash inflows are primarily denominated in Australian Dollars, European Community Euro, Japanese Yen, Chinese
Renminbi, United Kingdom Pounds and United States Dollars. Foreign currency outflows are primarily denominated in United States Dollars.
Excluding the Chinese Renminbi (which has a generally pegged exchange rate), the Group’s treasury risk management policy is to hedge
between 70% and 90% of forecast net operating cash flows for the first 6 months, with progressive reductions in percentages hedged over
the next six to twelve months. In accordance with this policy, the underlying forecast revenue and expenditure transactions in respect of
foreign currency cash flow hedges in place at reporting date, are expected to occur over the next 12 to 18 months. The parameters align the
hedge terms for foreign currency and fuel price risk. Hedges of foreign currency capital transactions are only undertaken if there is a large
volume of forecast capital transactions over a short period of time.
A proportion of United States Dollar denominated borrowings is designated as the hedging instrument in qualifying cash flow hedges of
highly probable forecast foreign currency sales of non-financial assets. A further proportion of United States denominated borrowings
remains unhedged to provide a natural offset to foreign currency movements within depreciation expense, resulting from revisions made
to aircra residual values during the year. These strategies reduce the level of derivative cover required to offset the foreign exchange
exposure on the remaining unhedged United States borrowings and finance lease obligations. Japanese Yen denominated finance lease
obligations are designated as the hedging instrument in qualifying cash flow hedges of highly probable forecast Japanese Yen revenues.
The Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk. Currency
exposure arising on the net assets of the Group’s foreign operations is managed primarily through borrowings denominated in the relevant
foreign currencies.
Notes to the Financial Statements (Continued)
As at 30 June 2013