Financial risk factors affecting Singapore Airlines Essay Example

in currency exchange would affect the profit of the company.

Singapore airlines (SIA) manage its foreign exchange exposure by a policy of corresponding the receipts and payments in each individual currency as far as possible. Surpluses of convertible currencies are sold, as soon as seen feasible, for USD and SGD. To further alleviate this risk, SIA uses forward foreign currency contracts and foreign currency options to hedge a portion of its future foreign exchange exposure by allowing them to sell currencies at a prearranged forward rate and buying either USD or SGD depending on forecast requirements. Surpluses of convertible currencies are sold, as soon as practicable, for USD and SGD forward foreign currency contracts are being used to prevaricate.

3. Interest rate

In relation to the loan, changes in interest rate fluctuation caused by inflation would affect the interest income and expense from short-term deposits and other interest-bearing financial assets and liabilities. In the current situation of price hike and high demand in oil (jet fuel), the interest rate is inevitability affected making it harder for Singapore Airlines to fulfill its financial covenants.

SIA 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. Interest swap agreements are in place with notional amounts whereby SIA pays a fixed rate of interest and receives a variable rate linked to LIBOR(London interbank offering rate)

4. Counterparty Risk

Excess funds are invested in interest-bearing bank deposits and other high quality short-term liquid investments like travel agencies, airlines and financial institutions. SIA has its largest investment in financial which account to 76% (appendix ann report pg 149)

of its overall financial assets. With this, there could be a chance that the counterparty would default on its payments due to unforeseen circumstances like for travel agencies which high profits occur in a cyclical period due to holiday seasons.

These risks are being mitigated by limiting the aggregated exposure on all outstanding financial instruments to any individual counterparty, taking into account its credit rating and adjusting as necessary thus mitigating the non-performance by these counterparties. SIA monitors and constantly reviews the economic exposures like country and industry it is in and the credit rating of its counterparties.

5. Liquidity Risk

SIA has cash and short-term deposits amounting to $5,119.0 million, $5,117.6 million as of 2007 and available short-term credit facilities of about $200 million, 880.6 million as of 2007. With these holdings of cash and short-term deposits, together with committed funding facilities and net cash flow from operations, these cash is expected to be adequate to provide the cost of all firm aircraft deliveries outstanding in the subsequent financial year. If there is an occurrence of a shortfall, it would be met by bank borrowings or public market funding.

6. Credit Risk

This is a risk of loss due to a debtor's non-payment of a loan or other line of credit. The group as of 2008 has trade debtors of 2,043.8 million from an increase of 306.1 million from the last year. The Group Debts Review Committee reviews the follow up actions on outstanding receivables monthly and transactions are limited to financial institutions carrying a high credit quality and hence mitigating the risk of default. Receivables and payables among airlines are settled either bilaterally or via the IATA Clearing

House. Receivables and payables are usually netted and developed at weekly intermission, which also reduces in the risk of non-payment.

Operational Risk

Singapore airlines would face a higher exposure to hazards that may jeopardize operations or weaken safety defences. Some of which are the failure to maintain aircraft conditions and underperforming scheduling of flights. By mistaking hazards as outcomes, it would interfere with proper identification of actual risks; this could expose SIA to prosecution and publicity risks which would dampen the image of Singapore airlines and ultimately affecting the reliability of investors and customers. With regards to the loan, if SIA would place a certain collateral on a fixed asset (Eg: an aircraft) and because of an absence of due diligence, an aircraft accidently collides with it and damages the aircraft, that 200 million loan would be insecured.

To mitigate this risk, the Civil Aviation Authority of Singapore (CAAS) has come up with a Safety Management System that ensures that SIA is able to

1. Identify specific risk(s) associated with each hazard, e.g. aircraft colliding with construction equipment,

2. Produce adequate controls in place to prevent problems arising and

3. Have mitigation measures ready in case things still go wrong.

Market risk

Operationally, the Airline is facing stronger competition from new low cost regional airlines like Air-Asia, Valuair and tiger Air. Recently, some low cost carriers like Air Asia and Oasis airlines have also planned to enter long haul route.

Singapore Airlines have responded by upgrading their service and offering more space and comfort in all service classes, however this strategy reduces the capacity per plane. Singapore Airlines hope to be able to charge premium price and increase utilization through this strategy.

Unforeseen Risks

One prevalent

risk that all airlines including SIA face is terrorism. In this volatile world, airlines still continue to be a target for terrorism and have an adverse economic effect on the airlines like SIA, like the 9/11 situation in the United States, air travel declined causing a 20% cutback in air travel capacity thus affecting profit. If our bank were to attach cash as collateral, we might have to wait longer or for the industry to improve. Singapore's government has taken up measures to heighten up the security in airports and on board aircrafts.

Other types of risks Singapore airline face are air borne diseases which as an effect on travel especially to affected countries. One example would be the Severe Acute Respiratory Syndrome (SARS), which had undermined air travel as well as defence spending in most of the world. And global war which would also affect Singapore airline adversely.

One major risk Singapore airlines is exposed to is an economic recession where in this volatile economy where prices of goods and services are rising, consumers mainly tourists would find flying overseas less affordable thus causing demand to fall.

Other kinds of financial risk would be the credit rating, revenue management and changes to tax laws in Singapore which would affect the overall company's image and profitability.