Singapore Airlines 2015 Annual Report Download - page 195

37 Financial Instruments (in $ million) (continued)
(b) Fair values (continued)
Financial instruments not carried at fair value but for which fair value is disclosed
The deposits placed with a financial institution (Note 27) and purchase option price payable to lessor (Note 19) is classified
as Level 3 under the fair value hierarchy. The fair value is estimated by discounting expected future cash flows at market
incremental lending rate for similar types of lending at the end of the reporting period.
38 Financial Risk Management Objectives and Policies (in $ million)
The Group operates globally and generates revenue in various currencies. The Group’s airline operations carry certain financial
and commodity risks, including the eects of changes in jet fuel prices, foreign currency exchange rates, interest rates and the
market value of its investments. The Group’s overall risk management approach is to moderate the eects of such volatility on
its financial performance through the use of derivatives to hedge specific exposures.
As derivatives are used for the purpose of risk management, they do not expose the Group to market risk because gains and
losses on the derivatives oset losses and gains on the matching asset, liability, revenues or expenses being hedged. Moreover,
counterparty credit risk is generally restricted to any hedging gain from time to time, and not the principal amount hedged.
Therefore the possibility of a material loss arising in the event of non-performance by a counterparty is considered to be unlikely.
Financial risk management policies are periodically reviewed and approved by the Board Executive Committee (“BEC”).
(a) Jet fuel price risk
The Group’s earnings are aected by changes in the price of jet fuel. The Group’s strategy for managing the risk on fuel price,
as defined by BEC, aims to provide the Group with protection against sudden and significant increases in jet fuel prices.
In meeting these objectives, the fuel risk management programme allows for the judicious use of approved instruments
such as swaps, options and collars with approved counterparties and within approved credit limits.
Cash flow hedges
The Group manages this fuel price risk by using swap, option and collar contracts and hedging up to eight quarters forward
using jet fuel swap, option and collar, Brent swap and crack swap contracts.
The Group has applied cash flow hedge accounting to these derivatives as they are considered to be highly eective
hedging instruments. A net fair value loss before tax of $952.9 million (2014: gain before tax of $85.5 million), with a related
deferred tax credit of $162.0 million (2014: deferred tax charge of $13.8 million), is included in the fair value reserve in
respect of these contracts.
Jet fuel price sensitivity analysis
The jet fuel price risk sensitivity analysis is based on the assumption that all other factors, such as fuel surcharge and
uplied fuel volume, remain constant. Under this assumption, and excluding the eects of hedging, an increase in price
of one USD per barrel of jet fuel aects the Group’s and the Company’s annual fuel costs by $50.0 million and $41.8 million
(FY2013/14: $46.6 million and $39.1 million) respectively.
The fuel hedging sensitivity analysis is based on contracts that are still outstanding as at the end of the reporting period
and assumes that all jet fuel, Brent and crack hedges are highly eective. Under these assumptions, with an increase
or decrease in jet fuel prices, each by one USD per barrel, the before tax eects on equity are set out in the table below.
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