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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.
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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?
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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.
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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?
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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.
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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.
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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?
Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give. –William A. Ward
Think Asset-Business-Structure (ABS)
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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?
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