global airlines

GLOBAL AIRLINES

ADNAN BRKICKAREN GUAN

BHUPINDER KAURCANDICE ZHOU

AGENDA

AIRLINE INDUSTRY ANALYSIS

GENERAL COSTS PROFITABILITY

SOUTHWEST AIRLINES OVERVIEW FINANCIAL

STATEMENTSRISK

MANAGEMENT

SINGAPORE AIRLINES OVERVIEW FINANCIAL

STATEMENTSRISK

MANAGEMENT

INDUSTRY OVERVIEW SOUTHWEST AIRLINES SINGAPORE AIRLINES

AIRLINE INDUSTRY OVERVIEW

THE INTERNATIONAL AIRLINE INDUSTRY PROVIDES SERVICE FOR BOTH PASSAGENERS

AND GOODS TO EVERY CORNER OF THE WORLD.IT IS A MAJOR ECONOMIC FORCE

INFLUENCES BOTH THE RELATED INDUSTRIES SUCH AS TOURISM, AIRCRAFT MANUFACTURE

AND INDIVIDUALS WHO TRAVEL BY AIR.


AIRLINE CATEGORIES

INTERNATIONAL

NATIONAL

REGIONAL

CARGO


AIRLINE ALLIANCES

LARGEST PASSENGER ALLIANCES• STAR ALLIANCE• SKY TEAM• ONEWORLD

LARGEST CARGO ALLIANCES• WOW ALLIANCE• SKY TEAM CARGO• ANA/UPS ALLIANCES

ADVANTAGES• COST REDUCTION• INCREASED DEPARTURES FOR TRAVELLERS

DISADVANTAGES• LESS COMPETITION


COST STRUCTURE


FUEL COST 15-35% OF TOTAL COSTS

LABOUR 40% OF TOTAL COSTS

DEPRECIATION & AMMORTIZATIONMAINTENANCEFOOD/BEVERAGES/SUPPLIESCOMMUNICATIONS AND INFORMATION TECHAIRCRAFT FINANCING

OTHER FACTORS INFLUENCING COSTS


GOVERNMENT REGULATIONS

• DEREGULATION DECREASES BARRIERS TO ENTRY

• INCREASED COMPETITION

NATURAL AND SECURITY RISKS

• WEATHER• NATURAL

DISASTERS• INCREASED

SECURITY COSTS

INDUSTRY PROFITABILITY


FACTORS DECREASE AIRLINE FARES AND REVENUES

COMPETITIVE PRESSURE FROM LOW-COST CARRIERS

THE LOSS OF CONSUMER CONFIDENCE IN THE AIR TRANSPORTATION SYSTEM’S RELIABILITY AND OPERATING PERFORMANCE,

THE TRANSPARENCY OF PRICING FACILITATED BY THE INTERNET AND ONLINE TRAVEL DISTRIBUTION CHANNELS


LOAD FACTOR


PASSENGER AND CARGO STATISTICS


MAJOR RISKS


OPERATIONAL RISKS

OPERATIONAL RISKS ARISE FROM THE MORE TACTICAL ASPECTS OF RUNNING THE BUSINESS DAY-TO-DAY

ORGANIZATIONAL SOLUTIONS REDESIGN THE

PROCESS ORGANIZATION

STRUCTURAL CHANGES IMPROVED

COMMUNICATION PERFORMANCE

MEASUREMENT REWARD SYSTEMS CAPITAL ALLOCATION


STRATEGIC RISKS

STRATEGIC RISKS ARE DEFINED BY BUSINESS DESIGN CHOICES AND HOW THESE INTERACT WITH VARIOUS EXTERNAL FACTORS. EG:

SHIFTS INCUSTOMER TASTES

INDUSTRY CONSOLIDATION

SOLUTIONSTHROUGH THE

SELECTION OF THE BUSINESS DESIGN ITSELF.

TRADITIONA RESPONSES CREATING A CULTURE

FOCUSED ON CUSTOMER DEVELOPING A RIGOROUS

STRATEGIC PLANNING PROCESS

MAINTAINING AN INDEPENDENT BOARD OF DIRECTORS


SOUTHWEST AIRLINES


COMPANY OVERVIEW

IN 1967, INCORPORATED WITH 3 BOEING 737 AIRCRAFTSIN 1971, CHANGED NAME FROM AIR SOUTHWEST CO. TO SOUTHWEST AIRLINES CO. IN 1973, REALIZED ITS FIRST YEAR IN PROFIT

NATION’S LARGEST DOMESTIC PASSENGER CARRIERSERVES 72 CITIES IN 37 STATES3,400 FLIGHTS A DAY AND HAS NEARLY 35,000 EMPLOYEES

LOWEST COST STRUCTUREAQUIRED AIRTRAN AIRWAYS AS A WHOLLY-OWNED SUBSIDIARYLISTED AS LUV ON NEW YORK STOCK EXCHANGE


SOUTHWEST AIRLINES

“THE MISSION OF SOUTHWEST AIRLINES IS DEDICATION TO THE HIGHEST

QUALITY OF CUSTOMER SERVICE DELIVERED WITH A SENSE OF WARMTH, FRIENDINESS, INDIVIDUAL PRIDE, AND

COMPANY SPIRIT.”

MISSION STATEMENT


FINANCIALS


INCOME STATEMENT


QUARTERLY INCOME STATEMENT


BALANCE SHEET


QUARTERLY BALANCE SHEET


QUARTERLY CASH FLOW


CASH FLOW


QUARTERLY CASH FLOW


GENERAL RISK FACTORS

FUEL PRICES

ECONOMIC CONDITION

SECURITY CONCERNS

GLOBAL CONDITIONS

COMPANY’S LOW-COST STRUCTURE

LABOUR INTENSIVE BUSINESS

DEPENDENCY ON ONE SUPPLIER


RISK MANAGEMENT POLICY

FIRM USES DERIVATIVE INSTRUMENTS TO MITIGATE THE RISK OF JET FUEL PRICE INCREASES

TO REDUCE VOLATILITY IN OPERATING EXPENSES FIRM USES A FUEL HEDGING PROGRAM


HEDGING GOVERNANCE STRUCTURE

CREATE AND MAINTAIN A COMPREHENSIVE RISK MANAGEMENT POLICY

• PROVIDE FOR PROPER SEGREGATION OF DUTIES

PROVIDE FOR PROPER AUTHORIZATION BY THE APPROPRIATE LEVELS OF MANAGEMENT

• MAINTAIN AN APPROPRIATE LEVEL OF KNOWLEDGE REGARDING THE EXECUTION OF AND THE ACCOUNTING FOR DERIVATIVE INSTRUMENTS

HAVE KEY PERFORMANCE INDICATORS IN PLACE TO ADEQUATELY MEASURE THE PERFORMACE OF ITS HEDGING ACTIVITIES


RISK MANAGEMENT COMMITTEE

AUDIT COMMITTEE CHARTER DEALS WITH RISK MANAGEMENT

DISCUSSES THE FIRM’S MAJOR FINANCIAL RISK EXPOSURES

EVALUATES THE FIRM’S RISK ASSESSMENT AND RISK MANAGEMENT POLICIES

ANALYSES THE MANAGEMENT’S INITIATIVE TO MONITOR, CONTROL, OR MITIGATE SUCH EXPOSURES


TYPES OF RISKS

•DERIVATIVES USED TO MANAGE FUEL HEDGING PROGRAMMARKET RISK

•FLOATING RATE DEBT OBLIGATIONS•INTEREST RATE SWAPS

INTEREST RATE RISK

•JET FUEL REQUIRED TO OPERATE ITS AIRCRAFT FLEET

COMMODITY PRICE RISK

•INSTABILITY OF CREDIT, CAPITAL, AND, ENERGY MARKETS•WEAK INDUSTRY REVENUES MAY AFFECT COMPANY’S CREDIT RATING

LIQUIDITY RISK

•NONPERFORMANCE BY THE COUNTERPARTIES TO THE DERIVATIVE AGREEMENTSCREDIT RISK


JET FUEL EXPENSE

Year Cost (Millions) Average Cost Per Gallon Percent of Operating Expenses2005 1,470$ 1.13$ 21.4%2006 2,284$ 1.64$ 28.0%2007 2,690$ 1.80$ 29.7%2008 3,713$ 2.44$ 35.1%2009 3,044$ 2.12$ 30.2%2010 3,620$ 2.51$ 32.6%First Quarter 2011 1,294$ 2.90$ 35.1%Second Quarter 2011 1,631$ 3.29$ 38.8%Third Quarter 2011 1,586$ 3.23$ 38.8%


JET FUEL EXPENSE

Year Cost (Millions) Average Cost Per Gallon Percent of Operating Expenses2005 1,470$ 1.13$ 21.4%2006 2,284$ 1.64$ 28.0%2007 2,690$ 1.80$ 29.7%2008 3,713$ 2.44$ 35.1%2009 3,044$ 2.12$ 30.2%2010 3,620$ 2.51$ 32.6%First Quarter 2011 1,294$ 2.90$ 35.1%Second Quarter 2011 1,631$ 3.29$ 38.8%Third Quarter 2011 1,586$ 3.23$ 38.8%

FOR THE SEVEN CONSECUTIVE YEARS, FUEL AND OIL EXPENSE REPRESENTED THE COMPANY’S LARGEST OR SECOND LARGEST COST.


HIGH DEPENDENCY ON FUEL UNPREDICTABLE AND

UNCONTROLLABLE PRICE MOVEMENTS

LIMITED ABILITY TO PASS ON HIGHER FUEL COST TO CUSTOMERS

FUEL PRICE RISK


FUEL HEDGING

NOT WIDELY TRADED ON FUTURES EXCHANGES


FUEL HEDGING

NOT WIDELY TRADED ON FUTURES EXCHANGES

SOUTHWEST USES CROSS-HEDGES IN THE OTC MARKET ON THE FOLLOWING: CRUDE OIL HEATING OIL UNLEADED GASOLINE


DERIVATIVES USED

CALL OPTIONS COLLARS (BUY CALL OPTION, WRITE

PUT OPTION) CALL SPREADS (BUY CALL OPTION AND

WRITE CALL OPTION) SWAP AGREEMENT


FUEL HEDGING POLICY

WHEN SOUTHWEST PERCEIVES THAT PRICES ARE LOWER THAN HISTORICAL OR EXPECTED FUTURE LEVELS, THEY PREFER TO USE FIXED PRICE SWAP AGREEMENTS AND PURCHASED CALL OPTIONS.

HOWEVER, AT TIMES WHEN THEY PERCEIVE THAT PURCHASED CALL OPTIONS HAVE BECOME TOO EXPENSIVE, THEY CHOOSE TO USE MORE COLLAR STRUCTURES AND CALL SPREADS.


DERIVATIVES

SOUTHWEST FUEL DERIVATIVE CONTRACTS AS OF OCTOBER 17, 2011


DERIVATIVES

THE LOCATION OF ALL ASSETS AND LIABILITIES ASSOCIATED WITH THE COMPANY’S HEDGING INSTRUMENTS


INTEREST RATE HEDGING

THE FLOATING RATES RECOGNIZED DURING 2010, BASED ON ACTUAL AND FORWARD RATES AT DECEMBER 31, 2010, UNDER THE COMPANY’S FIXED-TO-FLOATING INTEREST RATE AGREEMENTS



INTEREST RATE HEDGES FIXED THE FOLLOWING FLOATING-RATE TERM LOANS:$600 MILLION FLOATING-RATE LOAN AT 5.223%

UNTIL MATURITY $332 MILLION FLOATING-RATE LOAN AT 6.64%

UNTIL MATURITY


SINGAPORE AIRLINES


SINGAPORE AIRLINES

“SINGAPORE AIRLINES IS A GLOBAL COMPANY DEDICATED TO PROVIDING

AIR TRANSPORTATION SERVICES OF THE HIGHEST QUALITY AND TO MAXIMIZING

RETURNS FOR THE BENEFIT OF ITS SHAREHOLDERS AND EMPLOYEES”

MISSION STATEMENT


COMPANY OVERVIEW

1947 FOUNDED AS MALAYSIAN AIRLINES1972 SPLIT TO SINGAPORE AIRLINESLISTED AS SIA MAINBOARD ON SINGAPORE EXCHANGE

MAJOR SHAREHOLDERS:• SINGAPORE GOVERNMENT THROUGH TEMASEK HOLDINGS (PTE) LTD 55.37%• DBS NOMINEES (PTE) LTD 7.70%• CITIBANK NOMINEES SINGAPORE (PTE) LTD 7.20%

PREMIER FLIGHT CARRIER“SINGAPORE GIRL” IS THEIR SIGNATURE BRANDMOST AWARDED AIRLINE


COMPANY OVERVIEW

SINGAPORE AIRLINES GROUP HAS OVER 20 SUBSIDIARIES

• CONTINUES TO INVEST IN RELATED BUSINESSES RATHER THAN DIVERSIFYING OUTSIDE THE AVIATION INDUSTRY

MAIN SUBSIDIARIES INCLUDE :

• SIA CARGO• SIA ENGINEERING COMPANY• SILKAIR• TRADEWINDS TOURS AND TRAVELS

FINANCIAL

• GROUP 2010-11 PROFIT BEFORE TAX SGD$1 419 000 000 • ROE 7.9%

• AIRLINE 2010-11 PROFIT BEFORE TAX SGD$1 194 000 000


COMPANY OVERVIEW

CHAIRMANSTEPHEN

LEE CHING YEN

DIRECTOR AND CEO

GOH CHOON FONG

DIRECTORWILLIAM

FUNG KWOK LUN

KEY EXECUTIVE COMPENSATION 2011

SALARY, BONUSES, SHARE-BASED COMPENSATION

SGD$4 900 000

DIRECTOR COMPENSATION

SALARY, BONUSES, SHARE-BASED COMPENSATION

SGD$5 000 000

TOTAL 7 DIRECTORS


FINANCIALS


INCOME STATEMENT


QUARTERLY INCOME STATEMENT


INCOME STATEMENT


BALANCE SHEET


QUARTERLY BALANCE SHEET


BALANCE SHEET


CASH FLOW


QUARTERLY CASH FLOW


CASH FLOW


CASH FLOW SEGMENTAL FORECASTS AND ASSUMPTIONS


RISK MANAGEMENT


RISK MANAGEMENT

BENCHMARKING AGAINST INTERNATIONAL STANDARD

ISO 31000

RISK MANAGEMENT PRINCIPLES AND GUIDELINES

GENERIC FOCUSED ON ENTERPRISE WIDE RISK

SPECIFICATIONSRISK DEFINED AS “UNCERTAINTY ON OBJECTIVES”

CAN BE APPLIED TO ANY TYPE OF RISK BOTH NEGATIVE OR POSITIVE


RISK MANAGEMENT

FOCUS •JET FUEL PRICE RISK

FOCUS •INTEREST RATE RISK

FOCUS •FOREIGN EXCHANGE RISK

•MARKET PRICE RISK

•LIQUIDITY RISK

•CREDIT RISK


DERIVATIVES

o FORWARD CURRENCY CONTRACTSo FOREIGN CURRENCY OPTIONSo CROSS CURRENCY SWAPSo INTEREST RATE SWAPS

o INTEREST RATE CAP CONTRACTSo JET FUEL EQUIVELANTS


DERIVATIVES

HEDGE 15 MONTHS FORWARD


FUEL HEDGING


FUEL HEDGING

SENSITIVITY ANALYSIS

HEDGING LOSS


CURRENCY HEDGING

FINANCIAL YEAR ENDED MARCH 2011: FOREIGN CURRENCY ACCOUNTED FOR 63.5% OF TOTAL

REVENUE FOREIGN CURRENCY ACCOUNTED FOR 64.0% OF TOTAL

OPERATING EXPENSES



SENSITIVE TO INTEREST RISK BECAUSE

• IMPACTS INTEREST INCOME• VULNERABLE TO EXPENSES FROM SHORT-TERM DEPOSITS• VULNERABLE TO EXPENSES FROM INTEREST-BEARING ASSETS AND LIABILITIES

STRATEGY

• INTEREST RATE CAP STRIKE RATE 6.50% MATURING IN 6 – 7 YEARS TO HEDGE AGAINST RISK OF INCREASE IN AIRCRAFT LEASE RENTALS


THANK YOU

global airlines

Documents

net industry profit

individual risks

airline employment

risk management

tourism industries

total costslabour40

global economy

related industries