Singapore Airlines

(20-05-2020, 10:27 AM)ACTIVIST SPEAKS Wrote:

(20-05-2020, 10:13 AM)edragon Wrote:

(20-05-2020, 08:42 AM)ACTIVIST SPEAKS Wrote: Hazarding a Guess...

As the fuel hedging ineffectiveness is recorded as non-cash item, it should be a revaluation exercise (mark to market) rather than a realized loss.  In extension, it is logical to assume that the hedge contracts (be it a swap, option or collar) should still be operative which exposed the company to either gain or further loss (as mgt expected) depending on the fuel prices.

Great stuff written here in the last couple days....

Put it simply ... a hedge is a bet in layman terms. If you loose a bet, you lost it. It does not matter if you continue to bet and hoping to win the next bet.
SIA have lost the hedge and it is a confirmed loss and no need to say in future we may win. 
That is for the future and no one knows it is a win or a loss.

The question is whether the bet is still on or there is no more bet....from the financial statements, it suggests the position is not closed.  SQ acknowledges they have lost and that is why there is a charge to the income statement as Fuel Hedging Ineffectiveness.

It is not surprising that they offset those deliveries with future contracts as they are still operating which they presume will be 'normal' times but who knows about this Covid-19 event. 
So, the immediate on-going contracts which they committed will most likely be a loss as well due to no deliveries (settlement) when due, reason being planes are grounded.

My interpretation is that the "Fuel hedging ineffectiveness" was due to an over-hedged position. i.e. they hedged more than the actual fuel consumption during the FY. [$709.8m]

As for "hedging gain/loss", they were the "effective" hedges where they could offset the fuel consumption. [$130.2m] 

These hedges would have "expired" and closed, therefore recognized in the P&L. 

For the hedges that are not expired, their fair value changes are recognized in "other comprehensive income". [$2,092.8m]

Correct me if I'm wrong.

(20-05-2020, 11:26 AM)cif5000 Wrote: My interpretation is that the "Fuel hedging ineffectiveness" was due to an over-hedged position. i.e. they hedged more than the actual fuel consumption during the FY. [$709.8m]

As for "hedging gain/loss", they were the "effective" hedges where they could offset the fuel consumption. [$130.2m] 

These hedges would have "expired" and closed, therefore recognized in the P&L. 

For the hedges that are not expired, their fair value changes are recognized in "other comprehensive income". [$2,092.8m]

Correct me if I'm wrong.

Hi cif5000

Under p&l (exclude 130m) - should be closed/ ineffective hedge. 
Under OCI or reserves - effective ongoing hedge.

Basically it mean, if it is a hedge( effective), then co. Does not need to recognize gain/loss in income statement until end of the hedge where it will then recognise under fuel cost. If it is not a hedge( trading/ ineffective), then gain/loss need to recognise in income statement. 

The key is how the co. Layout what is effective.

You can read Clement explanation earlier for better understanding

SIA in its result announcement indicated that the $710 million is mark-to-market losses for CURRENT FY.
It also said that for "accounting" purpose, it had to account for the "losses".
Which seems to suggest that the losses are front-loaded. Alternatively, it could also mean that there won't be any more hedging losses for current FY as it has already been accounted for in the last FY?

Since it is mark to market. There will be gain/ loss everytime SIA do a mark to market until hedge closed. Where real money come in.

This is one of the most important expertise of an Airline (especially not originated from an oil producing Country) Jet fuel hedging.
Airlines business is really about burning Jet fuel, think about it.
Airlines have to hedge (speculate) their main variable cost due to the fact that their main product (air-tickets) is sold forward fixed up to a year.

To VB forum members, a question: Is this a value proposition?

SIA is the most aggressive airline in fuel hedging. It hedges fuel up to the year 2023 if I'm not wrong.
Not all airlines hedge fuel. Airlines in China don't hedge at all.

In my opinion, Airlines worldwide will face several large challenges.

1) Significantly reduced international air travel demand. With the world not having a unified response to the pandemic, opening of borders remains a risky and politically difficult proposition even in countries where the outbreak is under control. Add to that a perception issue, current social distancing proposals as well as a economic recession and it is a recipe for a prolonged recovery period.

2) Reduction in value of their frequent flier programs. Many airlines have been selling rewards points to banks and financial institutions for funding, enabling them to rely less on traditional financing. The value of these points have started to come under pressure recently, even before the pandemic, due to the expected reduction of bank merchant swipe fees. The pandemic and resulting reduction in demand for air travel will make this component of funding for airlines less and less profitable i presume.

Actually hedging is not betting; not hedge is betting... that's a common misconception. It's equivalent to saying buying insurance is betting. Hedging helps in managing pricing and costing with more certainty. Another option is not to hedge so your pricing will fluctuate with your cost and assuming demand inelastic. With oil usuallly at cotango means SIA always pay a premium to spot so there is a cost for certainty ie insurance premium.

To make things even more complicated, operational companies if adopt a hedging policy will have to manage the duration of the hedge. If say your company is with limited life, your hedge is quite defined say 3 years or 5 years. But when you hedge fuel for an on-going concern that needs jet fuel every day you have to decide the tenor and that's where the judgement comes. You may have hedged a good price today for next year but does not mean your hedge going forward next year for the following year would be good. So do you hedge 2 years instead of one?

In short do you buy say 3 year term life or a whole life policy?

The results speak for itself. Loss of S$700M speaks volume and nothing to be proud of whatever they now put forward as justification.
You buy?