Global Airlines
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ADNAN BRKIC KAREN GUAN BHUPINDER KAUR CANDICE ZHOU AIRLINE INDUSTRY ANALYSIS GENERAL COSTS PROFITABILITY SOUTHWEST AIRLINES OVERVIEW FINANCIAL STATEMENTS RISK MANAGEMENT SINGAPORE AIRLINES OVERVIEW FINANCIAL STATEMENTS RISK MANAGEMENT SOUTHWEST AIRLINES SINGAPORE AIRLINES 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. SOUTHWEST AIRLINES SINGAPORE AIRLINES INTERNATIONAL NATIONAL REGIONAL CARGO SOUTHWEST AIRLINES SINGAPORE AIRLINES 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 SOUTHWEST AIRLINES SINGAPORE AIRLINES FUEL COST 15-35% OF TOTAL COSTS LABOUR 40% OF TOTAL COSTS DEPRECIATION & AMMORTIZATION MAINTENANCE FOOD/BEVERAGES/SUPPLIES COMMUNICATIONS AND INFORMATION TECH AIRCRAFT FINANCING SOUTHWEST AIRLINES SINGAPORE AIRLINES GOVERNMENT REGULATIONS • DEREGULATION DECREASES BARRIERS TO ENTRY • INCREASED COMPETITION NATURAL AND SECURITY RISKS • WEATHER • NATURAL DISASTERS • INCREASED SECURITY COSTS SOUTHWEST AIRLINES SINGAPORE AIRLINES SOUTHWEST AIRLINES SINGAPORE AIRLINES 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 SOUTHWEST AIRLINES SINGAPORE AIRLINES SOUTHWEST AIRLINES SINGAPORE AIRLINES SOUTHWEST AIRLINES SINGAPORE AIRLINES SOUTHWEST AIRLINES SINGAPORE AIRLINES ORGANIZATIONAL SOLUTIONS OPERATIONAL RISKS ARISE FROM THE MORE TACTICAL ASPECTS OF RUNNING THE BUSINESS DAYTO-DAY REDESIGN THE PROCESS ORGANIZATION STRUCTURAL CHANGES IMPROVED COMMUNICATION PERFORMANCE MEASUREMENT REWARD SYSTEMS CAPITAL ALLOCATION SOUTHWEST AIRLINES SINGAPORE AIRLINES STRATEGIC RISKS ARE DEFINED BY BUSINESS DESIGN CHOICES AND HOW THESE INTERACT WITH VARIOUS EXTERNAL FACTORS. EG: SHIFTS INCUSTOMER TASTES INDUSTRY CONSOLIDATION SOLUTIONS THROUGH 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 SINGAPORE AIRLINES INDUSTRY OVERVIEW SINGAPORE AIRLINES IN 1967, INCORPORATED WITH 3 BOEING 737 AIRCRAFTS IN 1971, CHANGED NAME FROM AIR SOUTHWEST CO. TO SOUTHWEST AIRLINES CO. IN 1973, REALIZED ITS FIRST YEAR IN PROFIT NATION’S LARGEST DOMESTIC PASSENGER CARRIER SERVES 72 CITIES IN 37 STATES 3,400 FLIGHTS A DAY AND HAS NEARLY 35,000 EMPLOYEES LOWEST COST STRUCTURE AQUIRED AIRTRAN AIRWAYS AS A WHOLLY-OWNED SUBSIDIARY LISTED AS LUV ON NEW YORK STOCK EXCHANGE INDUSTRY OVERVIEW SINGAPORE AIRLINES MISSION STATEMENT “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.” INDUSTRY OVERVIEW SINGAPORE AIRLINES INDUSTRY OVERVIEW SINGAPORE AIRLINES INDUSTRY OVERVIEW SINGAPORE AIRLINES INDUSTRY OVERVIEW SINGAPORE AIRLINES INDUSTRY OVERVIEW SINGAPORE AIRLINES INDUSTRY OVERVIEW SINGAPORE AIRLINES INDUSTRY OVERVIEW SINGAPORE AIRLINES INDUSTRY OVERVIEW SINGAPORE AIRLINES INDUSTRY OVERVIEW SINGAPORE AIRLINES INDUSTRY OVERVIEW SINGAPORE AIRLINES INDUSTRY OVERVIEW SINGAPORE AIRLINES INDUSTRY OVERVIEW SINGAPORE AIRLINES INDUSTRY OVERVIEW SINGAPORE AIRLINES INDUSTRY OVERVIEW SINGAPORE AIRLINES INDUSTRY OVERVIEW SINGAPORE AIRLINES INDUSTRY OVERVIEW SINGAPORE AIRLINES INDUSTRY OVERVIEW SINGAPORE AIRLINES INDUSTRY OVERVIEW SINGAPORE AIRLINES FUEL PRICES COMPANY’S LOWCOST STRUCTURE ECONOMIC CONDITION LABOUR INTENSIVE BUSINESS SECURITY CONCERNS DEPENDENCY ON ONE SUPPLIER GLOBAL CONDITIONS INDUSTRY OVERVIEW SINGAPORE AIRLINES 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 INDUSTRY OVERVIEW SINGAPORE AIRLINES 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 INDUSTRY OVERVIEW SINGAPORE AIRLINES 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 INDUSTRY OVERVIEW SINGAPORE AIRLINES MARKET RISK INTEREST RATE RISK COMMODITY PRICE RISK LIQUIDITY RISK CREDIT RISK INDUSTRY OVERVIEW • DERIVATIVES USED TO MANAGE FUEL HEDGING PROGRAM • FLOATING RATE DEBT OBLIGATIONS • INTEREST RATE SWAPS • JET FUEL REQUIRED TO OPERATE ITS AIRCRAFT FLEET • INSTABILITY OF CREDIT, CAPITAL, AND, ENERGY MARKETS • WEAK INDUSTRY REVENUES MAY AFFECT COMPANY’S CREDIT RATING • NONPERFORMANCE BY THE COUNTERPARTIES TO THE DERIVATIVE AGREEMENTS SINGAPORE AIRLINES Year 2005 2006 2007 2008 2009 2010 First Quarter 2011 Second Quarter 2011 Third Quarter 2011 INDUSTRY OVERVIEW Cost (Millions) $ $ $ $ $ $ $ $ $ 1,470 2,284 2,690 3,713 3,044 3,620 1,294 1,631 1,586 Average Cost Per Gallon Percent of Operating Expenses $ 1.13 21.4% $ 1.64 28.0% $ 1.80 29.7% $ 2.44 35.1% $ 2.12 30.2% $ 2.51 32.6% $ 2.90 35.1% $ 3.29 38.8% $ 3.23 38.8% SINGAPORE AIRLINES Year 2005 2006 2007 2008 2009 2010 First Quarter 2011 Second Quarter 2011 Third Quarter 2011 Cost (Millions) $ $ $ $ $ $ $ $ $ 1,470 2,284 2,690 3,713 3,044 3,620 1,294 1,631 1,586 Average Cost Per Gallon Percent of Operating Expenses $ 1.13 21.4% $ 1.64 28.0% $ 1.80 29.7% $ 2.44 35.1% $ 2.12 30.2% $ 2.51 32.6% $ 2.90 35.1% $ 3.29 38.8% $ 3.23 38.8% FOR THE SEVEN CONSECUTIVE YEARS, FUEL AND OIL EXPENSE REPRESENTED THE COMPANY’S LARGEST OR SECOND LARGEST COST. INDUSTRY OVERVIEW SINGAPORE AIRLINES HIGH DEPENDENCY ON FUEL UNPREDICTABLE AND UNCONTROLLABLE PRICE MOVEMENTS LIMITED ABILITY TO PASS ON HIGHER FUEL COST TO CUSTOMERS INDUSTRY OVERVIEW SINGAPORE AIRLINES NOT WIDELY TRADED ON FUTURES EXCHANGES INDUSTRY OVERVIEW SINGAPORE AIRLINES NOT WIDELY TRADED ON FUTURES EXCHANGES SOUTHWEST USES CROSS-HEDGES IN THE OTC MARKET ON THE FOLLOWING: CRUDE OIL HEATING OIL UNLEADED GASOLINE INDUSTRY OVERVIEW SINGAPORE AIRLINES CALL OPTIONS COLLARS (BUY CALL OPTION, WRITE PUT OPTION) CALL SPREADS (BUY CALL OPTION AND WRITE CALL OPTION) SWAP AGREEMENT INDUSTRY OVERVIEW SINGAPORE AIRLINES 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. INDUSTRY OVERVIEW SINGAPORE AIRLINES SOUTHWEST FUEL DERIVATIVE CONTRACTS AS OF OCTOBER 17, 2011 INDUSTRY OVERVIEW SINGAPORE AIRLINES SOUTHWEST FUEL DERIVATIVE CONTRACTS AS OF OCTOBER 17, 2011 INDUSTRY OVERVIEW SINGAPORE AIRLINES THE LOCATION OF ALL ASSETS AND LIABILITIES ASSOCIATED WITH THE COMPANY’S HEDGING INSTRUMENTS INDUSTRY OVERVIEW SINGAPORE AIRLINES 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 INDUSTRY OVERVIEW SINGAPORE AIRLINES 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 INDUSTRY OVERVIEW SINGAPORE AIRLINES INDUSTRY OVERVIEW SOUTHWEST AIRLINES MISSION STATEMENT “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” INDUSTRY OVERVIEW SOUTHWEST AIRLINES 1947 FOUNDED AS MALAYSIAN AIRLINES 1972 SPLIT TO SINGAPORE AIRLINES LISTED AS SIA MAINBOARD ON SINGAPORE EXCHANGE MAJOR SHAREHOLDERS: • SINGAPORE GOVERNMENT THROUGH TEMASEK HOLDINGS (PTE) LTD • DBS NOMINEES (PTE) LTD • CITIBANK NOMINEES SINGAPORE (PTE) LTD PREMIER FLIGHT CARRIER “SINGAPORE GIRL” IS THEIR SIGNATURE BRAND MOST AWARDED AIRLINE INDUSTRY OVERVIEW SOUTHWEST AIRLINES 55.37% 7.70% 7.20% 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 INDUSTRY OVERVIEW SOUTHWEST AIRLINES TOTAL 7 DIRECTORS STEPHEN LEE CHING YEN INDUSTRY OVERVIEW KEY EXECUTIVE COMPENSATION 2011 DIRECTOR COMPENSATION SALARY, BONUSES, SHAREBASED COMPENSATION SALARY, BONUSES, SHAREBASED COMPENSATION SGD$4 900 000 SGD$5 000 000 GOH CHOON FONG SOUTHWEST AIRLINES WILLIAM FUNG KWOK LUN INDUSTRY OVERVIEW SOUTHWEST AIRLINES INDUSTRY OVERVIEW SOUTHWEST AIRLINES INDUSTRY OVERVIEW SOUTHWEST AIRLINES INDUSTRY OVERVIEW SOUTHWEST AIRLINES INDUSTRY OVERVIEW SOUTHWEST AIRLINES INDUSTRY OVERVIEW SOUTHWEST AIRLINES INDUSTRY OVERVIEW SOUTHWEST AIRLINES INDUSTRY OVERVIEW SOUTHWEST AIRLINES INDUSTRY OVERVIEW SOUTHWEST AIRLINES INDUSTRY OVERVIEW SOUTHWEST AIRLINES INDUSTRY OVERVIEW SOUTHWEST AIRLINES INDUSTRY OVERVIEW SOUTHWEST AIRLINES INDUSTRY OVERVIEW SOUTHWEST AIRLINES INDUSTRY OVERVIEW SOUTHWEST AIRLINES INDUSTRY OVERVIEW SOUTHWEST AIRLINES INDUSTRY OVERVIEW SOUTHWEST AIRLINES INDUSTRY OVERVIEW SOUTHWEST AIRLINES INDUSTRY OVERVIEW SOUTHWEST AIRLINES INDUSTRY OVERVIEW SOUTHWEST AIRLINES INDUSTRY OVERVIEW SOUTHWEST AIRLINES UTILIZE PREVENTATIVE AND MITIGATION CONTROLS TO MANAGE RISK EXPOSURE WITH TOLERANCE LIMITS RISK MANAGEMENT PHILOSOPHY BUSINESS UNITS UTILIZE BOTTOM-UP APPROACH INDUSTRY OVERVIEW CORPORATE REVIEW CREATES TOP-DOWN PERSPECTIVE SOUTHWEST AIRLINES BENCHMARKING AGAINST INTERNATIONAL STANDARD ISO 31000 RISK MANAGEMENT PRINCIPLES AND GUIDELINES GENERIC FOCUSED ON ENTERPRISE WIDE RISK SPECIFICATIONS RISK DEFINED AS “UNCERTAINTY ON OBJECTIVES” CAN BE APPLIED TO ANY TYPE OF RISK BOTH NEGATIVE OR POSITIVE INDUSTRY OVERVIEW SOUTHWEST AIRLINES FOCUS • JET FUEL PRICE RISK FOCUS • INTEREST RATE RISK FOCUS • FOREIGN EXCHANGE RISK • MARKET PRICE RISK • LIQUIDITY RISK • CREDIT RISK INDUSTRY OVERVIEW SOUTHWEST AIRLINES o FORWARD CURRENCY CONTRACTS o FOREIGN CURRENCY OPTIONS o CROSS CURRENCY SWAPS o INTEREST RATE SWAPS o INTEREST RATE CAP CONTRACTS o JET FUEL EQUIVELANTS INDUSTRY OVERVIEW SOUTHWEST AIRLINES HEDGE 15 MONTHS FORWARD INDUSTRY OVERVIEW SOUTHWEST AIRLINES INDUSTRY OVERVIEW SOUTHWEST AIRLINES SENSITIVITY ANALYSIS HEDGING LOSS INDUSTRY OVERVIEW SOUTHWEST AIRLINES FINANCIAL YEAR ENDED MARCH 2011: FOREIGN CURRENCY ACCOUNTED FOR 63.5% OF TOTAL REVENUE FOREIGN CURRENCY ACCOUNTED FOR 64.0% OF TOTAL OPERATING EXPENSES INDUSTRY OVERVIEW SOUTHWEST AIRLINES 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 INDUSTRY OVERVIEW SOUTHWEST AIRLINES
