Singapore Airlines 2002 Annual Report Download - page 96

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96
Notes to the Financial Statements
31 March 2002
SIA Annual Report 01/02
32 Financial Instruments (in $ million)
(a) Financial risk management objectives and policies
The Group operates globally and generates revenue in various currencies. The Group’s airline operations carry certain financial and
commodity risks, including the effects 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 minimize the effects of such volatility on its financial
performance.
Financial risk management policies are periodically reviewed and approved by the Board Finance Committee (“BFC”).
(b) Jet fuel price risk
The Group’s earnings are affected by changes in the price of jet fuel. The Group manages this risk by using swap and option
contracts up to 24 months forward. A change in price of one US cent per American gallon affects the Group’s annual fuel costs by
US$13.1 million, before accounting for US Dollar (“USD”) exchange rate movements and changes in volume of fuel consumed.
(c) Foreign currency risk
The Group is exposed to the effects of foreign exchange rate fluctuations because of its foreign currency denominated operating
revenues and expenses. These generally account for about 79.3% of total revenue and 53.5% of total operating expenses. The
Group’s largest exposures are from USD, UK Sterling Pound (“GBP”), Japanese Yen, Euro, Swiss Franc, Australian Dollar, New
Zealand Dollar, Indian Rupee, Hong Kong Dollar, Taiwan Dollar, Chinese Renminbi, Korean Won, Thai Baht and Malaysian Ringgit.
The Group generates a surplus in all of these currencies, except for USD. The deficits in USD are attributable to capital expenditure,
leasing costs and fuel costs – all conventionally denominated and payable in USD.
The Group manages its foreign exchange exposure by a policy of matching, as far as possible, receipts and payments in each
individual currency. Surpluses of convertible currencies are sold, as soon as practicable, for USD and SGD. The Group also uses
forward foreign currency contracts to hedge a portion of its future foreign exchange exposure.
(d) Interest rate risk
The Group’s earnings are also affected by changes in interest rates due to the impact such changes have on interest income and
expense from cash, short-term deposits and interest-bearing financial assets and liabilities. The Group’s interest-bearing financial
liabilities with maturities above two years have predominantly fixed rates of interest or are hedged by matching interest-bearing
financial assets.
The Group’s cash, short-term deposits and interest-bearing financial assets and liabilities are predominantly denominated in SGD
and USD.
(e) Market price risk
The Group owned $480.7 million (2001: $369.6 million) in quoted equity and non-equity investments as of 31 March 2002. The
estimated market value of these investments was $467.7 million (2001: $376.4 million) as of 31 March 2002.
The market risk associated with these investments is the potential loss resulting from a decrease in market prices.
(f) Counter-party risk
Surplus funds are invested in interest-bearing bank deposits and other high quality short-term liquid investments. Counter-party risks
are managed by limiting aggregated exposure on all outstanding financial instruments to any individual counter-party, taking into
account its credit rating. Such counter-party exposures are regularly reviewed, and adjusted as necessary. This mitigates the risk of
material loss arising in the event of non-performance by counter-parties.
(g) Liquidity risk
As at 31 March 2002, the Group had at its disposal cash and short-term deposits amounting to $1,091.6 million (2001 : $1,272.3
million). In addition, the Group has available short-term credit facilities of about $1,700.0 million.
The Group’s holdings of cash and short-term deposits, together with committed funding facilities and net cash flow from operations,
are expected to be sufficient to cover the cost of all firm aircraft deliveries due in the next financial year. Any shortfall can be met by
aircraft financing via structured leases, bank borrowings or public market funding. Because of 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,
many of which relate to aircraft which will not be delivered for several years. The Group’s policies in this regard are in line with the
funding policies of other major airlines.