Cathay Pacific 2005 Annual Report Download - page 80

78 Cathay Pacific Airways Limited Annual Report 2005
27. Financial risk management
In the normal course of business, the Group is exposed to fluctuations in foreign exchange rates, interest rates and
jet fuel prices. These exposures are managed, sometimes with the use of derivative financial instruments, by the
Treasury Department of Cathay Pacific in accordance with the policies approved by the Finance Committee.
Derivative financial instruments are used solely for financial risk management purposes and the Group does not hold
or issue derivative financial instruments for trading purposes. Derivative financial instruments which constitute a
hedge do not expose the Group to market risk since any change in their market value will be offset by a compensating
change in the market value of the hedged items. Exposure to foreign exchange rates, interest rates and jet fuel price
movements are regularly reviewed and positions are amended in compliance with internal guidelines and limits.
(a) Credit risk
Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis.
The Group normally grants a credit term of 30 days to customers or follows the local industry standard with the
debt in certain circumstances being partially protected by bank guarantees or other monetary collateral.
Trade debtors mainly represented passenger and freight sales due from agents and amounts due from airlines for
interline services provided. The majority of the agents are connected to the settlement systems operated by the
IATA which is responsible for checking the credit worthiness of such agents and collecting bank guarantees or
other monetary collateral according to local industry practice. In most cases amounts due from airlines are settled
on net basis via an IATA clearing house. The credit risk with regard to individual agents and airlines is relatively low.
To manage credit risk, derivative financial transactions, deposits and funds are only carried out with financial
institutions which have high credit ratings and all counterparties are subject to prescribed trading limits which are
regularly reviewed. Risk exposures are monitored regularly by reference to market values.
At the balance sheet date there was no significant concentration of credit risk. The maximum exposure to credit
risk is represented by the carrying amount of each financial asset, including derivative financial instruments, in the
balance sheet and the amount of guarantees granted as disclosed in note 26 to the accounts. Collateral and
guarantees received in respect of credit terms granted as at 31st December 2005 is HK$2,602 million.
(b) Liquidity risk
The Group’s policy is to monitor liquidity and compliance with lending covenants, so as to ensure sufficient liquid
funds and adequate funding lines from financial institutions to meet liquidity requirements in both the short and
long term. The payment profile of financial liabilities is outlined in notes 13 and 18 to the accounts. Settlement of
these liabilities as they fall due will primarily be through liquid funds being funds generated from operations.
(c) Foreign currency risk
As an international airline, the Group’s revenue streams are denominated in a number of foreign currencies
resulting in exposure to foreign exchange rate fluctuations. The currencies giving rise to this risk are primarily
Japanese Yen, Euros, Taiwanese dollars and Australian dollars. To manage this exposure assets are, where
possible, financed in those foreign currencies in which net operating surpluses are anticipated, thus establishing a
natural hedge. In addition, the Group uses currency derivatives to reduce anticipated foreign currency surpluses.
The use of foreign currency borrowings and currency derivatives to hedge future operating revenues is a key
component of the financial risk management process, as exchange differences realised on the repayment of
financial commitments are effectively matched by the change in value of the foreign currency earnings used to
make those repayments.
Notes to the Accounts Supplementary Information