Global Airlines James Bolegoh Mauro Horie Richard Konings Zhe Liu Robbie Lydon.

Global AirlinesGlobal Airlines

James BolegohJames BolegohMauro HorieMauro Horie

Richard KoningsRichard KoningsZhe LiuZhe Liu

Robbie LydonRobbie Lydon

AgendaAgenda

IntroductionIntroduction Southwest airlinesSouthwest airlines Singapore airlinesSingapore airlines

Airline ProductsAirline Products

Provides fast passenger transportation, Provides fast passenger transportation, both nationally and internationallyboth nationally and internationally

Freight can also be transported quicklyFreight can also be transported quickly Substitutes:Substitutes:

– Car or busCar or bus– TrainTrain– BoatBoat

Industry CharacteristicsIndustry Characteristics

Cyclical in nature, with over expansion Cyclical in nature, with over expansion during upturns, and large cutbacks during during upturns, and large cutbacks during downturnsdownturns

Only marginally profitableOnly marginally profitable A special case due to:A special case due to:

– DefenseDefense– EconomicEconomic– FlagFlag

Revenue StructureRevenue Structure

The two main sources of revenue for The two main sources of revenue for Airlines are from:Airlines are from:

– Passenger faresPassenger fares– CargoCargo

Cost StructureCost StructureDIRECT OPERATING COST (DOC)

Flight Crew 7.1%

Fuel and Oil 12.1%

Landing Fees and En-Route Charges 8.8% 28.0%

Maintenance 10.4%

Depreciation/Rentals/Insurance 13.2%

Total DOC 51.6%

INDIRECT OPERATING COST (IOC)

Station and Ground 11.7%

Passenger Services

Cabin Attendants 7.2%

Other PAX Services 6.7% 13.9%

Ticketing, Sales and Promotion 16.6%

General and Administrative 6.1%

Total IOC 48.4%

World Airline Profits 1992-2002World Airline Profits 1992-2002

-15

-10

-5

0

5

10

15

20

US $ Billion

1992 1995 1998 2001

Operating ProfitNet Profit

Adverse Industry EffectsAdverse Industry Effects

9/11, SARS, and Iraq war9/11, SARS, and Iraq war The industry was already entering a down The industry was already entering a down

period prior to this catastrophic eventperiod prior to this catastrophic event Increasing fuel costs began late 2000Increasing fuel costs began late 2000 Huge losses and layoffs were announced Huge losses and layoffs were announced

shortly afterwardsshortly afterwards Large decline in the number of passengersLarge decline in the number of passengers

Industry OutlookIndustry Outlook

Recovery from industry shocksRecovery from industry shocks Expansion into developing marketsExpansion into developing markets Increased use of AlliancesIncreased use of Alliances

Strategic AlliancesStrategic Alliances

Sharing of resourcesSharing of resources Seamless global networkSeamless global network Competitive advantageCompetitive advantage

International Air Transport International Air Transport Association Market Share Association Market Share

Star Alliance24%

One World18%

SkyTeam13%

KLM / Northwest7%

Continental3%

Other32%

Japan Airlines 3%

Regulatory EnvironmentRegulatory Environment

Two key organizations that affect the Two key organizations that affect the international airlines are:international airlines are:– International Civil Aviation Organization International Civil Aviation Organization

Composed of representatives from member Composed of representatives from member countriescountries

– International Air Transport AssociationInternational Air Transport Association Comprised of International AirlinesComprised of International Airlines

US Regulatory ImpactUS Regulatory Impact

Airline Deregulation Act (1978)Airline Deregulation Act (1978)– To encourage a competitive air transportation To encourage a competitive air transportation

systemsystem

International Air Transport Competition Act International Air Transport Competition Act (1979)(1979)– 3 goals3 goals

Open Skies AgreementsOpen Skies Agreements

Airline Risk FactorsAirline Risk Factors

Financial risk Financial risk – Variability of revenue and costsVariability of revenue and costs

Strategic riskStrategic risk– Business design choicesBusiness design choices

Operational risk Operational risk – Tactical aspects of running the businessTactical aspects of running the business

Hazard riskHazard risk– Safety of physical assetsSafety of physical assets

What Risks are Hedged?What Risks are Hedged?

Fuel CostsFuel Costs Foreign Exchange RiskForeign Exchange Risk Interest RatesInterest Rates Credit Card GuaranteesCredit Card Guarantees

Southwest AirlinesSouthwest Airlines

Section OverviewSection Overview

Company backgroundCompany background Major risks and risk managementMajor risks and risk management Stock optionsStock options

Company BackgroundCompany Background

Founded in 1971 with flights between Dallas, Founded in 1971 with flights between Dallas, Houston and San AntonioHouston and San Antonio

Has become the forth largest major airline in the Has become the forth largest major airline in the United States in terms of revenues as of Dec.2002United States in terms of revenues as of Dec.2002

Has been the number one carrier in terms of Has been the number one carrier in terms of domestic boardings in the U.S. since May 2003domestic boardings in the U.S. since May 2003

Transports more than 64 million passengers per Transports more than 64 million passengers per year to more than 58 cities in 30 statesyear to more than 58 cities in 30 states

Southwest Route MapSouthwest Route Map

Fact SheetFact Sheet

Daily Departures:Daily Departures: 2,800 flights per day2,800 flights per day

Employees:Employees: 33,000 throughout the system33,000 throughout the system

Common Stock:Common Stock:Traded under the symbol LUV at NYSETraded under the symbol LUV at NYSE

2003 Financial Statistics:2003 Financial Statistics:• Net Income: Net Income: $442 million$442 million• Total Passengers Carried: Total Passengers Carried: $65.7 million$65.7 million• Total RPMs:Total RPMs: $47.9 million$47.9 million• Total Operating Revenue: Total Operating Revenue: $5.9 billion$5.9 billion• Passenger Load Factor:Passenger Load Factor: 66.8%66.8%

Company Fleet ProfileCompany Fleet Profile

Southwest operated 388 Boeing 737 Jets Southwest operated 388 Boeing 737 Jets (as of Dec, 2003)(as of Dec, 2003)

Company fleet has an average age of 9.5 Company fleet has an average age of 9.5 yearsyears

Type Number Seats

737-200 23 122

737-300 194 137

737-500 25 122

737-700 146 137

LUV LUV Financial PositionFinancial Position

2003 2002 Change

Operating Revenues (in millions) $5,937 $5,522 7.5%

Operating Expenses (in millions) $5,454 $5,104 6.9%

Operating Income (in millions) $483 $418 15.6%

Operating Margin 8.1% 7.6% 0.5pts

Net Income (in millions) $442 $241 83.4%

Net Margin 7.4% 4.4% 3.0pts

Net Income per Share (basic) $0.56 $0.31 80.6%

Net Income per Share (diluted) $0.54 $0.30 80.0%

Stockholders’ Equity $5,052 $4,422 14.2%

Return on Equity 8.7% 5.7% 3.0pts

LUV LUV Financial PositionFinancial Position

2003 2002 Change

Revenue Passengers Carried 65,673,945 63,045,988 4.2%

Revenue Passengers Miles (RPMs) (000s) 47,943,066 45,391,903 5.6%

Available Seat Miles (ASMs) (000s) 71,790,425 68,886,546 4.2%

Passenger Load Factor 66.8% 65.9% 0.9pts

Passenger Revenue Yield per RPM 11.97¢ 11.77¢ 1.7%

Operating Revenue Yield per ASM 8.27¢ 8.02¢ 3.1%

Operating Expenses per ASM 7.60¢ 7.41¢ 2.6%

Size of Fleet at Yearend 388 375 3.5%

Number of Employees at Yearend 32,847 33,705 (2.5%)

5-Year Stock Price Evolution5-Year Stock Price Evolution

9/11

SARS

Revenue SourceRevenue Source

(In Millions) Years Ended December 31

2003 2002 2001

Passenger $5,741 $5,341 $5,379

Freight 94 85 91

Other 102 96 85

Total 5,937 5,522 5,555

GrowthGrowth

For the five years ended 2001, the average For the five years ended 2001, the average annual capacity growth was 10%annual capacity growth was 10%

2002 - over 5%2002 - over 5% After 2002, the estimated annualized After 2002, the estimated annualized

growth rate over the next 10 years is growth rate over the next 10 years is roughly 8%roughly 8%

Cost StructureCost Structure

Interest expensesInterest expenses 1.7% 2.1% 1.4%1.7% 2.1% 1.4%

OPERATING EXPENSES: 2003 2002 200141% 39% 38%15% 15% 16%8% 8% 8%7% 7% 6%7% 7% 6%3% 4% 4%

0.9% 1% 2%Other operating expenses 18% 20% 20%

Aircraft rentals Agency commissions

Fuel and oilMaintenance materials & repairs Depreciation Landing fees and other rentals

Salaries, wages, and benefits

Major Types of RiskMajor Types of Risk

Market riskMarket risk–Fuel price riskFuel price risk

–Financial market riskFinancial market risk Interest rate riskInterest rate riskCredit riskCredit riskLiquidity and financing riskLiquidity and financing risk

Fuel Price RiskFuel Price Risk

Fuel price riskFuel price risk– Estimated 1.2B gallons of jet fuel for 2004. A change of $0.01 in fuel Estimated 1.2B gallons of jet fuel for 2004. A change of $0.01 in fuel

prices would impact fuel expenses by $12Mprices would impact fuel expenses by $12M– Makes cash flow and earnings unpredictableMakes cash flow and earnings unpredictable

Southwest solution - fuel hedgingSouthwest solution - fuel hedging– Not for trading purposesNot for trading purposes– Effective commodities - crude oil and heating oilEffective commodities - crude oil and heating oil– Short-term and long-termShort-term and long-term– Mixture of call options, collar structures, and fixed price swap Mixture of call options, collar structures, and fixed price swap

agreementsagreements– Hedged 80% of 2004 fuel requirement, 60% of 2005, and portions of Hedged 80% of 2004 fuel requirement, 60% of 2005, and portions of

2006-2007 as of Dec. 31, 20032006-2007 as of Dec. 31, 2003


Fuel hedging resultsFuel hedging results– Recognized gains of $171M in fuel expense (Table 1) Recognized gains of $171M in fuel expense (Table 1)

and unrealized gains of $123M, net of taxand unrealized gains of $123M, net of tax– A net asset of $251M at the end of 2003 (Table 2)A net asset of $251M at the end of 2003 (Table 2)– Sensitivity analysis: 10% change in commodity prices Sensitivity analysis: 10% change in commodity prices

would change fair value of derivative instruments by would change fair value of derivative instruments by approximately $125M and more or less than $125M of approximately $125M and more or less than $125M of changes in cash flows (as of Dec. 31, 2003)changes in cash flows (as of Dec. 31, 2003)


Fuel hedging results - Table 1Fuel hedging results - Table 1

In Millions 2003 2002 2001

Gains in fuel expense 171 44.5 79.9

Total fuel expense 830 762 771

Fuel Price RiskFuel Price RiskFuel hedging results - Table 2Fuel hedging results - Table 2

Financial Market RiskFinancial Market Risk

Financial market riskFinancial market risk– Interest Rate RiskInterest Rate Risk

– Credit RiskCredit Risk

– Liquidity and Financing RiskLiquidity and Financing Risk

Southwest strategySouthwest strategy– Capitalize conservativelyCapitalize conservatively

– Grow capacity steadily and profitablyGrow capacity steadily and profitably

– Strong B/S and modest financial leverageStrong B/S and modest financial leverage

– High credit rating - “A” with S&P’s rating; “Baa1” with High credit rating - “A” with S&P’s rating; “Baa1” with Moody’s rating on senior unsecured fixed-rate debtMoody’s rating on senior unsecured fixed-rate debt

Interest Rate RiskInterest Rate Risk

DebtDebt Short-term investmentShort-term investment LeasingLeasing

Interest Rate RiskInterest Rate Risk Interest rate risk Interest rate risk (debt)(debt)

– Changes in interest rate affect I/S and cash flow; may Changes in interest rate affect I/S and cash flow; may result in insolvency and bankruptcyresult in insolvency and bankruptcy

Southwest solutionSouthwest solution– Low debt strategy Low debt strategy

Total debt - $1.55B; low D/E ratio:0.30 (AMR:12.86, Total debt - $1.55B; low D/E ratio:0.30 (AMR:12.86, DAL:16.33, JBLU:1.65)DAL:16.33, JBLU:1.65)

– Market sensitive instrumentsMarket sensitive instruments Fixed rates and modest financial leverage ($475M)Fixed rates and modest financial leverage ($475M) Interest rate swaps ($760M)Interest rate swaps ($760M) Prepayment, redemption or termination for floating-rate Prepayment, redemption or termination for floating-rate

debt ($222M)debt ($222M)


Interest rate swap agreements (2003)Interest rate swap agreements (2003)– Agreement 1: pay LIBOR + a margin every Agreement 1: pay LIBOR + a margin every

6 month and receive 6.5% every 6 month 6 month and receive 6.5% every 6 month on $385M senior unsecured notes; due on $385M senior unsecured notes; due Mar-2012Mar-2012

– Agreement 2: pay LIBOR + a margin every Agreement 2: pay LIBOR + a margin every 6 month and receive 5.496% every 6 6 month and receive 5.496% every 6 month on $375M, 5.496% pass-through month on $375M, 5.496% pass-through certificates; due Nov-2006certificates; due Nov-2006


Interest rate risk (short-term investment)Interest rate risk (short-term investment)– Total cash and cash equivalents of $1.87B as of Dec. Total cash and cash equivalents of $1.87B as of Dec.

31, 200331, 2003– Parallel closely with floating interest ratesParallel closely with floating interest rates– Affects earnings and cash flowAffects earnings and cash flow

Southwest solutionSouthwest solution– Invests in certificates of deposit, highly rated money Invests in certificates of deposit, highly rated money

markets, and investment grade commercial papermarkets, and investment grade commercial paper– No additional actions to cover interest rate market risk No additional actions to cover interest rate market risk

and other material market interest rate risk and other material market interest rate risk management activitiesmanagement activities


Interest rate risk (leasing)Interest rate risk (leasing)– Total PV of leasing payments (2004 after): Total PV of leasing payments (2004 after):

Capital leasing - $91MCapital leasing - $91M Operating leasing - $2.5BOperating leasing - $2.5B

– Aircraft leases can be renewed at the end of the Aircraft leases can be renewed at the end of the lease term for one to five yearslease term for one to five years

– However, leases are not considered market However, leases are not considered market sensitive financial instruments and not included in sensitive financial instruments and not included in the interest rate sensitivity analysisthe interest rate sensitivity analysis


ResultsResults– No significant exposure to changing interest rates No significant exposure to changing interest rates

on fixed-rate debton fixed-rate debt– A liability of $18M - interest rate swapA liability of $18M - interest rate swap– Sensitivity analysis: 10% percent change would Sensitivity analysis: 10% percent change would

affect net earnings and cash flows by less than affect net earnings and cash flows by less than $1M (floating-rate debt, invested cash, and short-$1M (floating-rate debt, invested cash, and short-term investments)term investments)

– An increase in rates has a net positive effectAn increase in rates has a net positive effect

Credit RiskCredit Risk

Credit riskCredit risk– Nonperfomance by the counterparties associated with outstanding Nonperfomance by the counterparties associated with outstanding

financial derivative instrumentsfinancial derivative instruments– Results in credit lossResults in credit loss

Southwest solutionSouthwest solution– Selects and periodically reviews counterparties based on credit Selects and periodically reviews counterparties based on credit

ratingsratings– Limits the exposure to a single counterpartyLimits the exposure to a single counterparty– Monitors the market position Monitors the market position – Agreements with seven counterparties (early termination rights, Agreements with seven counterparties (early termination rights,

bilateral collateral provisions, security requirements)bilateral collateral provisions, security requirements)

ResultsResults– No counterparties fail to meet their obligationsNo counterparties fail to meet their obligations

Liquidity and Financing RiskLiquidity and Financing Risk

Liquidity and financing riskLiquidity and financing risk– Agreements with financial institutions (credit card transactions)Agreements with financial institutions (credit card transactions)– Credit facilityCredit facility– Outstanding debt agreementsOutstanding debt agreements– May reduce the availability of cash or increase the costs to keep May reduce the availability of cash or increase the costs to keep

the agreementsthe agreements

Southwest responsibilitySouthwest responsibility– Maintaining minimum credit ratingsMaintaining minimum credit ratings– Maintaining minimum assets fair valuesMaintaining minimum assets fair values– Achieving minimum covenant ratios for available or outstanding Achieving minimum covenant ratios for available or outstanding

debt agreementsdebt agreements

ResultsResults– The company met or exceeded the minimum standards set forth The company met or exceeded the minimum standards set forth

in the agreementsin the agreements

Risk Management GovernanceRisk Management Governance

No specific committee or RMO for Southwest’s No specific committee or RMO for Southwest’s risk management. risk management.

Other Potential Risks and Other Potential Risks and UncertaintiesUncertainties

War riskWar risk Competitive factorsCompetitive factors General economic conditionsGeneral economic conditions Factors to control costsFactors to control costs Operational disruptionsOperational disruptions

Stock OptionsStock Options

Stock-Based Employee Stock-Based Employee Compensation covers:Compensation covers:– Majority of employee groupsMajority of employee groups

– Board of directorsBoard of directors

– Plans related to certain contracts with Plans related to certain contracts with certain executive officers of the certain executive officers of the companycompany


Two classes of employee stock plans:Two classes of employee stock plans:– Collective bargaining plans Collective bargaining plans

Subjective to collective bargaining agreementsSubjective to collective bargaining agreements Granted at or above pair valueGranted at or above pair value Normally have terms ranging from 6 to 12 yearsNormally have terms ranging from 6 to 12 years No executive nor member of the Board of No executive nor member of the Board of

Directors are eligible to participate in this planDirectors are eligible to participate in this plan Not required to be approved by ShareholdersNot required to be approved by Shareholders


– Other employee plansOther employee plans Not subjective to collective bargaining Not subjective to collective bargaining

agreementsagreements Granted at fair market valueGranted at fair market value Have 10-year terms and become fully Have 10-year terms and become fully

exercisable after three, five or ten yearsexercisable after three, five or ten years Need to be approved by shareholdersNeed to be approved by shareholders

Stock OptionsStock OptionsOptions Outstanding Options Exercisable

Range of Exercise Prices

Options outstanding at 12/31/02

(000s)

Weighted average exercise

price

Options exercisable at 12/31/02

9000s)


price

$3.30 to $4.99 50,811 $4.05 38,717 $4.01

$5.11 to $7.41 3,341 5.85 2,586 5.91

$7.86 to $11.73 14,247 9.84 6,548 9.94

$12.11 to $18.07 61,369 13.85 14,738 14.01

$18.26 to $23.94 8,404 19.65 3,068 19.91

$3.30 to $23.94 138,172 9.99 65,657 7.67


Options Outstanding Options Exercisable

Option Plan

Options outstanding at 12/31/02

(000s)


price

Options exercisable at 12/31/02

(000s)


price

Collective Bargaining Plans

104,020 $9.51 52,733 $6.77

Other Employee Plans

34,152 $11.47 12,924 $11.33

$3.30 to $23.94 138,172 9.99 65,657 7.67

Shares Outstanding: 790 millionStock Price: $14.33

Singapore AirlinesSingapore Airlines

Section OverviewSection Overview

BackgroundBackground FinancialsFinancials RisksRisks Stock optionsStock options

SIA FactsSIA Facts

Founded in 1972Founded in 1972 SIA’s passenger network covers 60 cities in 33 SIA’s passenger network covers 60 cities in 33

countriescountries Singapore Airlines Cargo offers a network linking Singapore Airlines Cargo offers a network linking

68 cities in 36 countries, making it the 268 cities in 36 countries, making it the 2ndnd largest largest international cargo airlineinternational cargo airline

Average number of employees: 14,418Average number of employees: 14,418 Passengers carried: 15,326,000Passengers carried: 15,326,000

The GroupThe Group

Subsidiaries and Associated CompaniesSubsidiaries and Associated Companies– Singapore Airlines CargoSingapore Airlines Cargo– SIA Engineering Company (SIAEC)SIA Engineering Company (SIAEC)– Singapore Airport Terminal Services (SATS)Singapore Airport Terminal Services (SATS)– SilkAirSilkAir– Singapore Flying CollegeSingapore Flying College– Singapore Aircraft Leasing Enterprise (SALE)Singapore Aircraft Leasing Enterprise (SALE)

Awards and AccoladesAwards and Accolades

ForbesForbes– Made the world’s best companies rankingMade the world’s best companies ranking– Top 10 travel and transport companiesTop 10 travel and transport companies

FortuneFortune– Ranked 21Ranked 21stst in world’s most admired in world’s most admired

companiescompanies– Most admired airlineMost admired airline

Group Fleet ProfileGroup Fleet Profile

Group Fleet Profile Owned LeasedTotal in

useOn

orderOn option

Aircraft operated by SIA 78 18 96 31 51

Aircraft operated by SIA Cargo

9 3 12 5 9

Aircraft operated by SilkAir

8 1 9 7 2

Group Total 95 22 117 43 62

Average Fleet AgeAverage Fleet Age

Revenue CompositionRevenue Composition

32.3%

21.3%

20.1%

16.3%

10.0%

East Asia

Americas

Europe

South West Pacific

West Asia and Africa

Cost StructureCost StructureThe Group

2002-03 2001-02

EXPENDITURE

Staff costs 22.9% 21.0%

Fuel costs 19.0% 20.9%

Depreciation 11.1% 11.5%

Provision for impairment of fixed assets 0.4% 0.0%

Aircraft maintenance and overhaul costs 8.0% 6.6%

Commission and incentives 6.9% 6.9%

Landing, parking and overflying charges 5.9% 6.3%

Handling charges 5.3% 6.5%

Rentals on lease of aircraft 3.7% 3.7%

Material costs 3.2% 3.7%

Inflight meals 2.2% 2.6%

Advertising and sales costs 2.1% 2.3%

Insurance expenses 1.8% 1.2%

Company accommodation and utilities 1.4% 1.7%

Other passenger costs 1.3% 1.4%

Crew expenses 1.0% 1.2%

Other operating expenses 3.7% 2.6%

Passenger and Cargo CarriedPassenger and Cargo Carried

Company Revenue and ExpenditureCompany Revenue and Expenditure

5-Year Stock Price Evolution5-Year Stock Price Evolution

9/11 SARS

SIAL.SI

Major ShareholdersMajor Shareholders

Major ShareholdersNumber of

shares %

1) Temasek Holdings (Private) Limited 691,451,172 56.76

2) Raffles Nominees Pte Ltd 138,233,298 11.35

3) DBS Nominees Pte Ltd 103,163,701 8.47

4) HSBC (Singapore) Nominees Pte Ltd 44,419,799 3.65

5) Citibank Nominees Singapore Pte Ltd 41,961,826 3.44

6) DB Nominees (S) Pte Ltd 24,130,937 1.98

7) United Overseas Bank Nominees Pte Ltd 21,890,687 1.8

8) Oversea-Chinese Bank Nominees Pte Ltd 6,917,092 0.57

9) Morgan Stanley Asia (Singapore) Securities Pte Ltd 6,661,881 0.55

10) Chang Shyh Jin 3,929,000 0.32

Total 1,082,759,393 88.89%

Financial Risk Management Financial Risk Management Objectives and PoliciesObjectives and Policies

Financial and commodity riskFinancial and commodity risk– Market riskMarket risk

Jet fuel price riskJet fuel price risk Foreign currency riskForeign currency risk Interest rate riskInterest rate risk Market price riskMarket price risk

– Counterparty riskCounterparty risk– Liquidity riskLiquidity risk

Other possible riskOther possible risk

Market RiskMarket Risk

Jet fuel price riskJet fuel price risk– A change in price of US$0.01 per A change in price of US$0.01 per

American gallon of jet fuel affects the American gallon of jet fuel affects the Group’s annual fuel costs by US$13.1 Group’s annual fuel costs by US$13.1 millionmillion

Jet fuel price risk managementJet fuel price risk management– Swaps and options contracts hedged up Swaps and options contracts hedged up

to 24 months forwardto 24 months forward

Market RiskMarket Risk cont. cont.

Foreign currency riskForeign currency risk– Foreign currency 78.4% of total revenueForeign currency 78.4% of total revenue– Largest exposures are from USD, UK Sterling Largest exposures are from USD, UK Sterling

Pound, Japanese Yen, Euro, Swiss Franc, Pound, Japanese Yen, Euro, Swiss Franc, Australian Dollar, New Zealand Dollar, Indian Australian Dollar, New Zealand Dollar, Indian Rupee, Hong Kong Dollar, Taiwan Dollar, Rupee, Hong Kong Dollar, Taiwan Dollar, Chinese Yuan, Korean Won, Thai Baht and Chinese Yuan, Korean Won, Thai Baht and Malaysian Ringgit (surplus)Malaysian Ringgit (surplus)

– Exposure from USD (deficit) due to capital Exposure from USD (deficit) due to capital expenditure, leasing costs and fuel costsexpenditure, leasing costs and fuel costs


Foreign currency risk managementForeign currency risk management– Matching policy, as far as possible, receipts Matching policy, as far as possible, receipts

and payments in each individual currencyand payments in each individual currency– Surpluses of convertible currencies are Surpluses of convertible currencies are

sold, as soon as practicable, for USD and sold, as soon as practicable, for USD and SGDSGD

– Forward foreign currency contracts to hedgeForward foreign currency contracts to hedge

Market Risk cont.Market Risk cont.

Derivative Financial Instruments 2003 2002

Foreign currency contracts

6 months or less 524.4 268.6

Over 6 months to 24 months 363.0 314.4

887.4 583.0

Jet fuel swap/option contracts

6 months or less 399.5 304.3

Over 6 months to 24 months 233.9 176.8

633.4 481.1

(Losses)/gains not in FSs (33.4) 14.4


Interest rate riskInterest rate risk– Changes in interest rates impact interest Changes in interest rates impact interest

income and expense from short-term income and expense from short-term deposits and other interest-bearing deposits and other interest-bearing financial assets and liabilitiesfinancial assets and liabilities


Interest rate risk managementInterest rate risk management– Interest-bearing financial liabilities with maturities above Interest-bearing financial liabilities with maturities above

one year have predominantly fixed rates of interestone year have predominantly fixed rates of interest– If this is not the case they are hedged by matching If this is not the case they are hedged by matching

interest-bearing financial assets in which case interest interest-bearing financial assets in which case interest rate swaps are used to convert interest income into the rate swaps are used to convert interest income into the same floating interest rate basis as interest expensesame floating interest rate basis as interest expense

– Interest swap agreements are in place with notional Interest swap agreements are in place with notional amounts ranging from $50.8 million to $70.2 million amounts ranging from $50.8 million to $70.2 million whereby SIA pays a fixed rate of interest and receives a whereby SIA pays a fixed rate of interest and receives a variable rate linked to LIBORvariable rate linked to LIBOR


Market price riskMarket price risk– Potential loss resulting from a decrease in Potential loss resulting from a decrease in

market pricesmarket prices– The Group owned $454.6 million (down 1.5% The Group owned $454.6 million (down 1.5%

from 2002) in quoted equity and non-equity from 2002) in quoted equity and non-equity investmentsinvestments

– Estimated market value of these investments Estimated market value of these investments was $522.9 millionwas $522.9 million

Counterparty RiskCounterparty Risk

Surplus funds invested in interest-bearing bank Surplus funds invested in interest-bearing bank deposits and other high quality short-term liquid deposits and other high quality short-term liquid investmentsinvestments

Counterparty risks are managed by limiting Counterparty risks are managed by limiting aggregated exposure on all outstanding financial aggregated exposure on all outstanding financial instruments to any individual counterparty, taking instruments to any individual counterparty, taking into account its credit ratinginto account its credit rating

These exposures are regularly reviewed, and These exposures are regularly reviewed, and adjusted as necessaryadjusted as necessary

Liquidity RiskLiquidity Risk

The Group had cash and short-term deposits of The Group had cash and short-term deposits of $819.9 million (down 25% from 2002)$819.9 million (down 25% from 2002)

Available short-term credit facilities of $1,550 Available short-term credit facilities of $1,550 million (down 8.8% from 2002)million (down 8.8% from 2002)

These are expected to be sufficient to cover the These are expected to be sufficient to cover the cost of all firm aircraft deliveries due in the next cost of all firm aircraft deliveries due in the next financial yearfinancial year

Additional financing through structured leases, Additional financing through structured leases, bank borrowings, or public market fundingbank borrowings, or public market funding

Financial and Commodity Risk cont.Financial and Commodity Risk cont.

* No balance sheet carrying amounts are shown as these are commitments as at year end.

Derivative Financial Instruments

Total carrying amount

on Balance SheetAggregate net

fair value

2003 2002 2003 2002

Financial assets

Long-term investments 569.6 590.4 637.8 631.1

Short-term investments 148.3 34.2 148.4 37.4

Financial liabilities

Notes payable 1,100.0 1,100.0 1,197.8 1,086.2

Derivative financial instruments

Foreign currency contracts * * (31.1) (3.4)

Jet fuel swap contracts * * 9.2 17.6

Jet fuel options contracts * * (11.5) 0.2

Other Possible RiskOther Possible Risk

Risk management committee’s of the Risk management committee’s of the different sdifferent subsidiaries and associated companies create the ability to react to unforeseen events such as– 9-119-11– SARSSARS– Iraq warIraq war– Bali bombingBali bombing

Risk Management GovernanceRisk Management Governance

SIA Board of Directors

Board Audit and RiskCommittee

SIA Group

Risk Management Committee

SIA SIAEC SATS Group SilkAir SIA CargoOther

Subsidiary

RMC RMC RMC RMC RMC RMC


SIA Share Option PlanSIA Share Option Plan– Employee Share Option SchemeEmployee Share Option Scheme

99.1% of options offered in 200299.1% of options offered in 2002

– Senior Executive Share Option SchemeSenior Executive Share Option Scheme 0.9% of options offered in 20020.9% of options offered in 2002

Stock Options cont.Stock Options cont.

All Stock OptionsAll Stock Options– Terms no longer than 10 yearsTerms no longer than 10 years– Price is determined by average 5 days prior to Price is determined by average 5 days prior to

date of grantdate of grant– TimingTiming

Employee – must wait 2 years to exerciseEmployee – must wait 2 years to exercise Senior Executive – 1 year wait for access to 25%, Senior Executive – 1 year wait for access to 25%,

and an additional 25% per year thereafterand an additional 25% per year thereafter


Date of Grant Exercisable Period Balance

(Dec 31. 03)Exercisable

Price

March 28, 2000March 28, 2001 – March 27, 2010

13,126,430 $15.34

July 3, 2000July 3, 2001 –July 2, 2010

11,868,350 $16.65

July 2, 2001July 2, 2002 –

July 1, 201113,173,990 $11.96

July 1, 2002July 1, 2003 – June 30, 2012

13,658,152 $12.82

Total Outstanding & Average Price 51,826,922 $14.17

609,072,000 shares in the market609,072,000 shares in the market


SIA Subsidiaries Share Option PlanSIA Subsidiaries Share Option Plan– SATSSATS

61,799,200 outstanding 61,799,200 outstanding


– SIAECSIAEC 60,301,000 outstanding 60,301,000 outstanding


SummarySummary

Industry overviewIndustry overview Firm specific examplesFirm specific examples

– Southwest AirlinesSouthwest Airlines– Singapore AirlinesSingapore Airlines

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Global Airlines James Bolegoh Mauro Horie Richard Konings Zhe Liu Robbie Lydon.

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Transcript of Global Airlines James Bolegoh Mauro Horie Richard Konings Zhe Liu Robbie Lydon.