Singapore Airlines 2008 Annual Report Download - page 148

Singapore Airlines Annual Report 2007-08
146
37 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 moderate the effects of
such volatility on its financial performance. The Group’s policy is to use 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 offset losses and gains on the matching asset, liability, revenues or costs 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 affected 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 and options with approved counterparties and within approved credit limits.
The Group manages this fuel price risk by using swap and option contracts and hedging up to 18 months forward
using jet fuel swap and option contracts, as well as up to 24 months forward using gasoil swaps. These gasoil swaps
will all be rolled up into jet fuel equivalents by hedging in the gasoil-jet fuel regrade closer to maturity. A change in
price of one US cent per American gallon of jet fuel affects the Group’s annual fuel costs by US$15.1 million (2006-07:
US$15.2 million), assuming no change in volume of fuel consumed.
(b) 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. For the financial year ended 31 March 2008, these accounted for 66% of total
revenue (2006-07: 66%) and 67% of total operating expenses (2006-07: 65%). 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.
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 and foreign currency options to hedge a portion of its future foreign
exchange exposure. Such contracts provide for the Group to sell currencies at predetermined forward rates, buying
either USD or SGD depending on forecast requirements, with settlement dates that range from one month up to one
year. The Group uses forward contracts and currency options purely as a hedging tool. It does not take positions in
currencies with a view to making speculative gains from currency movements.
(c) 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 short-term deposits and other interest-bearing financial assets and liabilities. The Group
enters into interest rate swaps to manage interest rate costs on its financial assets and liabilities, with the prior approval
of the BEC or Boards of subsidiary companies.
(d) Market price risk
The Group owned $464.3 million (2007: $596.0 million) in available-for-sale investments at 31 March 2008.
The market risk associated with these investments is the potential loss resulting from a decrease in market prices.
NOTES TO THE FINANCIAL STATEMENTS
31 March 2008