Quote:Cash flow hedges
The Group manages this fuel price risk by using swap, option and collar contracts and hedging up to 20 quarters forward using jet fuel swap, option and collar contracts, ICE Brent swap contracts and Brent-MOPS crack swap contracts.
21-04-2020, 02:51 PM (This post was last modified: 21-04-2020, 03:15 PM by karlmarx.)
Most businesses will want to have stability in their COGS or cost structure, to know how to price their products over the long-term, and formulate and execute expansion strategies.
If you are a fishball noodle hawker, you want the price of fishball and noodle to be stable. And if they're not, you will want to make long-term purchase contracts to be able to know how much to price your fishball noodles in a manner which is stable to consumers. Thankfully, for the hawkers, their input costs are stable enough such that they do not have to enter long-term purchase contracts.
What SIA is doing with regards to 'hedging' is the same. It is locking-in its fuel cost, which is one of its largest cost components of offering passenger/cargo flight services. It does so out of business/operational necessity.
Due to constantly shifting production alliances/cartels, and technological advancement -- not just in discovering and recovering more oil, but also in alternate energy sources -- crude oil prices has been fluctuating since industrial production of oil begun more than a hundred years ago. And will likely continue to fluctuate in the future.
SIA has been hedging their fuel needs for at least the past 50 years, and it has been ridiculed each time spot prices fall far below their hedged price. So long as SIA wants to offer price stability to its customers -- and I don't think they will abandon this -- it will continue to hedge fuel costs. And because oil markets are volatile, there will be years where their hedges appear smart, and years where they look terrible.
So if you want to be an SIA shareholder, you have to accept 'hedging losses' as one of the things that can occur from time to time.
In the past, SIA's 'losses' on fuel hedge can be more or less offset by setting higher ticket prices. The picture looks bad now because there's no flying demand (or supply). So it is sitting on lots of expensive fuel, and is unlikely to be able to recover the high COGS with higher ticket prices. Thankfully, shareholders stand ready to inject fresh capital into the company.
There are many other businesses stuck with similar high cost structures and no/low sales, such as a retail tenant who just renewed a 3-year lease. But retailers don't report 'hedging losses,' even though they certainly can get better rates if they were to renew their lease now, compared to before.
Nevertheless, companies which over-commit to high-cost long-term contracts will suffer severe consequences if their sales do not return faster than their payables come due.
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The virus is highly contagious even before a host patient shows symptoms, and can remain in the host for days after symptoms have disappeared. Locking down a community for a prolonged period of time will ensure that either the virus kills the hosts (wherein the virus also kills itself), or the host kills the virus completely.
The period of time required for this varies according to how effective the community is being locked down. So long as there is movement in the community -- and some of these people may be carriers, albeit unknowingly -- there will be the possibility of further infections.
Contract tracing's effectiveness is limited, since not everyone can accurately recall their whereabouts. And how do you locate the large number of possibly infected people a host may have come into contact with, say in a supermarket, or on a bus?
Hubei/Wuhan were in lockdown for 2.5 months before the spread was contained, and authorities were comfortable enough to lift restrictions. SG, being only in soft lockdown for two weeks, continues to report new community cases thus far.
Once SG has a week or two of no new cases -- which could be a month away or so -- it is likely that work will return to office, students will return to school, and so on.
But until the world is virus-free, which probably requires mass vaccination, it is not likely that SG will open its borders and allow air travel to resume, since that will almost certainly allow the virus to return to the community, and undermine all the work done to contain it. The 18 months closure of Terminal 2 is probably the kind of timeline which the state believes when air travel will be safe enough to resume.
This has implications not only for the companies involved -- CAG, SIA, SATS, SIAEC -- but also their suppliers and employees. Related industries such as hospitality and tourism will also face severe decrease in sales until borders are opened. So the people employed by these industries will not only be consuming less, if they have leveraged to purchase assets (real estate), they will probably be anxious to offload them.
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Over in the developed markets, some have lifted lockdown restrictions, while others are preparing to do so soon. Given the difficulty to contain the spread, it is likely that the easing of restrictions will lead to a continuation of infections. So long as infections do not spike and overwhelm a community's healthcare system, it is likely that some infection is seen as an acceptable compromise to the damage caused by an inactive economy. Nevertheless, as people remain cautious/fearful, economic activity in these markets will slow.
Being trade and export dependent, this means SG will also be hit by a general slowdown in global economic activity, in addition to the hit to local travel-related industries. Probably more vulnerable are the electronic manufacturers, and the oil, gas, petrochemical industries. There will be more 'hin leongs' which blow up as a result of overly-aggressive expansion/growth policies, and over-borrowing. But they will not be rescued like SIA.
While there has yet to be news of layoffs, the government's offer of cheap business loans and wage support may be insufficient to support the companies which were poorly capitalised, or had poor/noncompetitive operating performance prior to the pandemic, over a prolonged period of time.
In the local property and car markets, asking prices does not seem to have decreased meaningfully. But things could change a few months from now.
Before SIA announce their intention to sell Rights Issue, the depressed market was I thought a good time to average down.
After all since the last financial crisis, SIA share price had never (as far as I remembered) rose to the price I bought. I bought SIA because it is a blue chip stock and it was meant for my retirement.
After reading SIA plans of improving products, cost cutting, new ventures and partnering other airlines to open more routes, I took the plunge and started to average down.
Then the announcement of the rights issue and share plunge to below $6
The rights issue, I believe a large part is used for the lost incurred on hedging fuel 5 years into the future. On reflection, it seems no better than a speculating trader which I believe was what that department was doing to earn some KPI points. They should have learnt from previous crisis when oil prices dropped from $300 plus to a low hundred.
It is true even if it is a National Icon, one has to consider, are we investing for being patriotic or investing for wealth creation.
If I were to take up the rights, I have to pay a six figure sum to prevent myself from being diluted.
The last few days, I decided to sell everything I have.
Would I regret it, NO, lessons learnt from Noble. Retail just keep pumping money in on believing management that they are doing something for the company but behind they were paying themselves disproportionately to the situation of the company. Not that SIA would go the same way.
Its never too late to learn to cut lost. It seems easier than expected.
I am not very knowledgeable abt this hedging thingy but I wld think given the no. of financial instruments(e.g. swap, option and collar contracts) SIA employed, it may not be as straight fwd as locking in future prices, but to the effect that some instruments may offset each other.
(21-04-2020, 06:45 PM)davidoh Wrote: If I were to take up the rights, I have to pay a six figure sum to prevent myself from being diluted.
The last few days, I decided to sell everything I have.
Wow, for that sum of money, I think I wld probably do the same if I were in your shoes. All the best to your future investments.
The right apple to compare with a retail tenant renewing a 3 year lease imo should be an airline leasing airplanes
Hedging contracts in the markets have various duration short to long periods, allowing up to 20 quarters trying to stabilise cogs without regard to emergence of shale oil and revenue characteristics seems to indicate a fundamental flaw in their risk mgt
Std dev of hedges = 366mil
Std dev of extra fuel spending or saving = 980mil
Std dev of net gain/loss = 706mil
My thoughts from the above data:
- Hedges are supposed to run in opposite direction to your cost. There has been 7/10 years where hedging and prices are in different directions (ie. there is hedging losses but savings in fuel cost and vice versa)
- In years where fuel prices crashed (2008 and 2015), they always produce big savings but with big hedging losses as well.
- FY11 and FY12 were years that they spent big on fuel but hedging didn't really help. These were coincidentally the good old times when offshore was booming. They lost close to 2bil in those years.
- The standard deviation of hedges (366mil) is ~60% lower than the standard deviation of extra fuel spending/savings (980mil). OPEC's hanky panky and market changes seem to fluctuate more than Mgt's hedging methodology. The standard deviation of net gain/loss was 706mil, which is a 274mil reduction or 25% reduction in fluctuation. I think hedging did its job in the last 10 years.
- Over 10 years, the net loss was ~675mil. SIA spent about 50bil of fuel over that last 10 years. The loss translates to ~1% of their actual fuel cost in this period. I would like to infer that probably no gambling was done by SIA mgt, at least not in large scale.
SQ hedge position was presented in last page of it's recent 9M FY19 -20 result presentation ppt.
Attached in blog post below. (click for ppt)
Next topics - Virgin Australia.
SQ owns about 20% of Virgin Australia. (click for article)[url=smh.com.au/business/companies/singapore-airlines-boosts-stake-in-virgin-australia-20160407-go0bab.html][/url]
Singapore – Bangkok 3 weekly 787-10 Singapore – Chongqing 1 weekly 737-800 (Silk Air service) Singapore – Frankfurt 3 weekly 777-300ER Singapore – Hanoi 1 weekly A350-900XWB Singapore – Ho Chi Minh City 2 weekly 787-10 Singapore – Jakarta 5 weekly A350-900XWB Singapore – Kuala Lumpur 3 weekly A350-900XWB Singapore – London Heathrow 3 weekly A350-900XWB Singapore – Los Angeles 3 weekly A350-900XWB Singapore – Manila 2 weekly A350-900XWB Singapore – Seoul Incheon 2 weekly A350-900XWB Singapore – Shanghai Pu Dong 1 weekly 787-10 Singapore – Sydney 3 weekly 777-300ER Singapore – Tokyo Narita 3 weekly 787-10 Singapore – Zurich 3 weekly 777-300ER
Unfortunately, with the Extended CB announced yesterday, these plan need to be push backward. (click for details)
With Extended CB in place, SQ EGM for rights and MCB will be conducted remotely on 30 April 2020. (click to read announcement)
SIAS raised a few concerns on the the rights/MCB issues. (click for news article)
After reading, this is what I thought is important:
1. Calculated net gearing was -0.23 (after converted all rights MCB) and -0.40 (after converted all rights and additional MCB).
- is this too conservative?
- will SQ consider reducing the size of rights and take on some debt?
2. A large portion of the rights issued (38%) will be used for capital expenditure.
- what could this be? and why now?
3. SQ choose to raise $15 billion from shareholders.
- does it make sense to take out bank loan or other measure? since it's a national carrier.
I extracted these 2 questions from SIAS as it is the most important:
- What is SIA's assessment of the outlook for the aviation industry, given the Covid-19 Situation?
- ... Given the ongoing pandemic and overview uncertainty in the business environment, how does the airline intend to beef up its operational performance?
24-04-2020, 08:42 AM (This post was last modified: 24-04-2020, 08:43 AM by AQ..)
(15-04-2020, 01:33 PM)pianist Wrote: Didn't know virgin also has a low cost subsidiary called tigerair, is it the same as sia' tiger Air?
Look like sia majority stake in virgin going to be totally written off with the new shareholders' rescue
This should answer ur Q. A good read/summary in anycase.
"Virgin Australia joins UK’s domestic carrier Flybe in a list whose number is expected to increase of carriers going bust because of the Covid-19 pandemic. The Australian carrier’s request for aid to the tune of A$1.4 billion in loans convertible to equity was allegedly rejected by the government which said it “is not in the business of owning an airline.”
Virgin Australia which posted losses in the last seven years was A$5 billion (US$3.15 billion) in debt as at Dec 31, 2019. Its chief executive Paul Scurrah remained hopeful that the airline’s decision to go into voluntary administration while seeking new investors would secure its future and see it “emerging on the other side of the Covid-19 crisis.”
As Australia’s second largest airline set up to rival Qantas, Virgin Australia is trumping the card that the country needs a second airline as its exit would mean a near monopoly for its competitor.
Interestingly, Virgin Australia is 90-per cent foreign owned comprising the following partners: Etihad Airways (20%), Singapore Airlines (20%), China’s Nanshan Group (20%), China’s HNA Group which also owns Hainan Airlines (20%), and Richard Banson’s Virgin Group (10%).
For SIA, it is déjà vu as far as the Virgin brand is concerned. In 1999 SIA made headline news when it acquired a 49-per cent stake in Virgin Atlantic. A small but very successful airline which made it to the ranks of the world’s best was making a big move at a time when it was pursuing trans-Atlantic rights eyeing a link between London Heathrow and New York. However, the investment turned out to be lacklustre, and for many years after SIA made it known it was ready divest the stake. It took more than a decade for that to happen in 2012 when the stake was sold to Delta Air Lines at a hefty loss.
In that same year, SIA entered into marketing alliances with Virgin Australia and Virgin America. It was later to take up a stake in Virgin Australia, initially 10 per cent which increased to 20 per cent in 2013. It was interesting how this was then seen as a tussle for dominance between SIA and Air New Zealand (Air NZ) which was to later sell off its entire shareholding. It was reminiscent of the time back in 1999/2000 after the big Virgin hype when SIA and Air NZ were locked in battle over Ansett Australia. SIA became badly bruised subsequently in its acquisition of a 25-per cent stake in the ailing airline.
It would appear that SIA has a penchant for the Virgin brand. Both are reputable names, so any association can only mean strength in unity. A stake in Virgin Atlantic should give it a strong toehold in American market, as would its commercial tie-up with Virgin America. So too a stake in Virgin Australia, particularly in light of the competition with Qantas not just domestically through Virgin but internationally.
Yet the strategy seems to be not working as expected, turning out to be more expedient and circumstantial than constructive and advantageous. Perhaps when SIA finally relieved itself of the burden of ill-reputed Tiger Australia, selling its remaining stake to Virgin Australia for a dollar, it was a timely moment of strategic correction despite the conviction of then Virgin chief executive John Borghetti that “we will benefit from the economies and achieve profitability ahead of schedule by the end of 2016.”
Reading the crystal ball is no easy game. There are an abundant of risks but hopefully described as calculated rather than random. Or does one stick to the knitting? Even that comes with the risks of stagnation if you lag behind the competition.
In 2013, SIA announced a joint venture with India’s Tata Sons to set up a new airline based in New Delhi. It was third time lucky for SIA, which had made an earlier attempt with Tata but rebuffed by a change in the country’s civil aviation in 1997 that prevented foreign carriers from holding any stake in domestic markets. In 2000 they made a bid for a 40-per cent stake in Air India but met with political opposition which again rocked the application, leading to a withdrawal by SIA a year later. Within a year of operations, Vistara carried its millionth passenger.
SIA is said to be impressed by Vistara’s performance so far. The joint-venture airline which commenced operations in 2015 is expected to turn in a profit within five years. So it is crunch time to prove sceptics wrong. Perhaps then SIA has got it right this time."
24-04-2020, 09:12 AM (This post was last modified: 24-04-2020, 09:19 AM by money.)
(21-04-2020, 06:45 PM)davidoh Wrote: Before SIA announce their intention to sell Rights Issue, the depressed market was I thought a good time to average down.
After all since the last financial crisis, SIA share price had never (as far as I remembered) rose to the price I bought. I bought SIA because it is a blue chip stock and it was meant for my retirement.
After reading SIA plans of improving products, cost cutting, new ventures and partnering other airlines to open more routes, I took the plunge and started to average down.
Then the announcement of the rights issue and share plunge to below $6
The rights issue, I believe a large part is used for the lost incurred on hedging fuel 5 years into the future. On reflection, it seems no better than a speculating trader which I believe was what that department was doing to earn some KPI points. They should have learnt from previous crisis when oil prices dropped from $300 plus to a low hundred.
It is true even if it is a National Icon, one has to consider, are we investing for being patriotic or investing for wealth creation.
If I were to take up the rights, I have to pay a six figure sum to prevent myself from being diluted.
The last few days, I decided to sell everything I have.
Would I regret it, NO, lessons learnt from Noble. Retail just keep pumping money in on believing management that they are doing something for the company but behind they were paying themselves disproportionately to the situation of the company. Not that SIA would go the same way.
Its never too late to learn to cut lost. It seems easier than expected.
Good luck.
This takes courage and i think you have done a nice analysis on your own. I would make the same decision for SIA if i were in your shoes. And i would probably not bother to check the stock price for SIA in months to come
But i also dont think you need to take it too personally. Anyone who has invested in hotels, theme parks, oil companies, airlines, banks, shopping malls, and many many other businesses would have taken an unexpected hit due to the virus. Some have it more painful than others. The only difference is, for SIA, it would be game over if Temasek didnt step in
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