1. AIRLINE INDUSTRY
Stan Li, Jessica Liu,
Ben Mui, Edison Pei, Tony Yeung

2. Airlines
• Provide air transport services for
passengers or freight’
• Categories of airline services include:
• International
• National
• Regional
• Domestic

3. Major Issues
• Weather
• Fuel Cost -14-16% of an airline's total
costs
• Labor - 40% of an airline's expenses
• Other
• Airport capacity, route structures,
technology, and costs to lease or buy the
physical aircraft

4. Pressures from External Forces
• Threat of new entrants
• Power of suppliers
• Power of buyers
• Availability of substitutes
• Competitive rivalry

5. Key Success Factor
• Attracting customers
• Managing its fleet
• Managing its people
• Managing its finances

6. Industry Profit Pattern
• Cyclical industry
• Four or five years of poor
performance precede five or six
years of improved performance.
• Mature industry  consolidation
trend

7. Government Regulations
• Government has extensive regulation for
economic, political, and safety concerns
• Some countries (e.g. US and Australia)
have "deregulated" their airlines.
• The entry barriers for new airlines are
lower in a deregulated market,
• far greater competition
• average fares tend to drop 20% or more.

8. International Regulation
• Groups (e.g. International Civil Aviation
Organization) establish worldwide standards
for safety and other vital concerns.
• Most international air traffic is regulated by
bilateral agreements between countries.
• Bilateral agreements are based on the
"freedoms of the air“
• In the 1990s, "open skies" agreements
became more common

9. Major Risks Faced by Airlines
• Strategic risk
• Business design choices
• Financial risk
• Variability of revenue and costs
• Operational risk
• Tactical aspects of running the business
• Hazard risk
• Safety of physical assets

10. Risk Events Causing
Stock Drops 1991-2001
Source: Mercer analysis

11. Singapore Airline

12. Background
• Public company since 1972 in
Singapore Stock Exchange
• Wholly-owned subsidiary of the
Singapore government through
Temasek Hldgs (Pte)
• Its expanding route network covers
110 cities in 42 countries now.
• Having the fastest and youngest
growing fleets.

13. Coverage

14. Competitive Advantage
- Fleet Age Comparison

15. Decreased but Strong Profitability

16. Singapore Airline Company Structure
• Subsidiaries: SilkAir, Tradewinds Tour
and Travel, SIA Engineering Company,
SIA Cargo, and SATS
• All the companies are in closely related
business
• SIA accounts for about 75% of the
total revenue

17. The Group
2005-06 2004-05
ROA 6.55% 7.38%
ROE 9.29% 10.42%
EPS (cents) 101.7 111

19. Consolidated Income Statement

20. Stock Information

21. 5-year Stock Price Trend

22. List of Major Shareholders

23. Employee Stock Option (cont)
At the end of the financial year, options to take up
79,196,566 unissued shares in the Company were
outstanding, which is 6% of the total share
outstanding.

24. Financial Risk
• Market Risk
• Jet fuel price risk
• Foreign currency risk
• Interest rate risk
• Market price risk
• Counterparty risk
• Liquidity risk
• Other possible risk

25. Jet Fuel Price Risk

26. Jet Fuel Price Risk (cont)
• A change in price of US$0.01 per
American gallon of jet fuel affects
the Group’s annual fuel costs by
US$14.7 million
Jet fuel price risk management
• Swaps and options contracts hedged
up to 24 months forward
• The group has a 55% jet fuel hedge
ratio at $81 per barrel.

27. Jet Fuel Price Risk (cont.)
• FY2006 operating profit = $1.213B
• FY2005 operating profit = $1.317B
• Dropped $105 million (-7.9%)
• Mainly due to rise in higher jet fuel
price
• From this, one can see the profitability
of the group lies mainly on the hedge
strategy

28. Jet Fuel Price Risk (cont)
• Hedge by Mean of Platts Singapore
(MOPS)
• As of March 31st
2006, the MOPS price USD
$79.54
• Annualized volatility 2005-06 = 26.36%
• Risk free rate = 2.4%

29. Jet Fuel Price Risk (cont)
• On 26 April 2006, the Company announced
an increase of the fuel surcharge on tickets
sold from 15 May 2006
• The adjustments will offer partial relief of
higher operating costs arising from
persistently high price of jet fuel hovering at
US$90 per barrel, as compared to US$80 per
barrel when the surcharge was last revised
in September 2005.

30. • Net fair value gain of $82.2m
Jet Fuel Price Risk (cont)

31. Foreign Currency Risk
• Foreign currency accounts for 65% of total revenue
(2004-05: 68%) and 69% of total operating
expenses (2004-05: 64%)
• The Group’s largest exposures are from USD, Euro,
UK Sterling Pound, Swiss Franc, Australian Dollar,
New Zealand Dollar, Japanese Yen, Indian Rupee,
Hong Kong Dollar, Chinese Yuan, Korean Won and
Malaysian Ringgit.
• The Group generates a surplus in all of these
currencies, with the exception of USD.
• The deficit in USD is attributable to capital
expenditure, fuel costs and aircraft leasing costs –
all conventionally denominated and payable in USD.

32. Foreign Currency Risk Management
• The Group manages its foreign exchange
exposure by a policy of matching, as far as
possible, receipts and payments in each
individual currency.
• The Group also uses forward foreign
currency contracts to hedge a portion of its
future foreign exchange exposure.
• Such contracts provide for the group to sell
currencies at predetermined forward rates,
with settlement dates that range from one
month up to one year.
• The Group uses forward contracts purely as
a hedging tool.

34. Interest Rate Risk
• Interest rate risk
• Changes in interest rates impact
interest income and expense from
short-term deposits and other
interest-bearing financial assets and
liabilities

35. Interest Rate Risk (cont)
• Long-Term liabilities
• The company’s finance lease
commitments are charged at a margin
above the LIBOR. These ranged from
3.19% to 5.18% (2004-05: 1.56% to
2.31%) per annum.
• SIA Cargo’s finance lease commitments
are charged at a margin above the LIBOR.
These ranged from 2.88% to 4.74%
(2004-05: 1.15% to 2.65%) per annum.

37. Interest Rate Risk (cont)
• Long-Term Assets
• Non-equity investments of $382.4 million (2005:
$389.8 million) for the Group and the Company
relate to interest-bearing investments with an
effective annual interest rate of 3.97% (2004-05:
1.71%).
• During the financial year, the Group and the
Company recorded an impairment loss in the
profit and loss account of$1.0 million (2004-05:
$0.1 million) pertaining to unquoted equity
investments.
• The Group’s loan receivable within one year of
$42.0 million is unsecured and bears interest
between 3.19% to 5.05% (2004-05: 1.56% to
3.19%) per annum.

39. Interest Rate Risk (cont)
• As at 31 March 2006, the composition of cash and bank
balances held in foreign currencies by the Group is as follows:
USD – 21.8% (2005: 21.7%), EUR – 13.6% (2005: 21.1%)
and JPY – 13.2% (2005: 13.3%).
• Cash at bank earns interest at floating rates based on daily
bank deposit rates ranging from 1.38% to 4.71% (2004-05:
0.28% to 2.20%) per annum.
• Short-term deposits are made for varying periods of between
one day and three months depending on the immediate cash
requirements of the Group,
• earn interests at the short-term deposit rates. The weighted
average effective interest rate of short-term deposits is 3.6%

41. Market Price Risk
• Potential loss resulting from a decrease
in market prices
• Such as lower airfares
• The Group owned $412.2 million
(2005: $41.6 million) in quoted equity
and non-equity investments at 31
March 2006.

42. Counterparty Risk
• Surplus funds are invested in interest-
bearing bank deposits and other high quality
short-term liquid investments.
• Counterparty risks are managed by limiting
aggregated exposure on all outstanding
financial instruments to any counterparty,
taking into account its credit rating. Such
counterparty exposures are regularly
reviewed, and adjusted necessary.
• This mitigates the risk of material loss
arising in the event of non-performance by
counterparties.

43. Liquidity Risk
• At 31 March 2006, the Group had cash and short-
term deposits amounting to $3,151.6 million (2005:
$2,840.2 million). In addition, the Group had
available short-term credit facilities of about
$1,449.1 million (2005: $1,417.1 million).
• The Group also has Medium Term Note Programmes
under which it may issue notes up to $1,500 million
(2005: $1,500 million).
• Under these Programmes, notes issued by the Company
may have maturities as may be agreed with the relevant
financial institutions, and notes issued by one of its
subsidiary companies may have maturities between one
month and ten years.

44. Liquidity Risk Management
• The Group’s holdings of cash and short-term
deposits are expected to be sufficient to cover the
cost of all firm aircraft deliveries due in the next
financial year.
• any shortfall would be met by bank borrowings or
public market funding.
• Due to the necessity to plan aircraft orders well in
advance of delivery
• it is not economical for the Group to have committed
funding in place at present for all outstanding orders.
• The Group’s policies in this regard are in line with
the funding policies of other major airlines.

45. Other Possible Risks
• Risk management committee’s of the
different subsidiaries and associated
companies create the ability to react to
unforeseen events such as
• 9-11
• SARS
• Iraq war
• Bali bombing

46. Risk Management Governance
SIA Board of Directors
Board Audit and Risk
Committee
SIA Group
Risk Management
Committee
SIA SIAEC
SATS
Group
SilkAir
SIA
Cargo
Other
Subsidiary
RMC RMC RMC RMC RMC RMC

47. Statement on Risk Management
• 1) Enhancement to Risk Framework
• Intro of strategic risks framework
• Identify and report strategic risks and other
long-term issues for senior management
attention.
• Review of Risks to Singapore Airlines
Reputation
• Review of Regulatory Compliance

48. • 2) Simulations and Tests of Risk
Control
• Conducted throughout the year to test the
effectiveness of risk controls and handling
of business continuity
• The exercise tested recall responses,
communications systems, functional
preparedness and management decision-
making under simulated “crisis scenarios”.
Statement on Risk Management

49. • 3) Other Risk Process and Program
• Annual Risk Management Review
• Whistle Blowing Program
• All “wrong-doings” can be reported and investigate to an
independent investigation unit
• “Wrong-doings” can include fraud, theft, abuse of
authority, breach of regulations or non-compliance with
corporate policy such as improper banking or financial
transactions.
• Banking Transaction Procedures
• Lenders to Singapore Airlines must be properly
authorized
• All group companies/divisions has its own approved
limits and procedures that must be followed
Statement on Risk Management

50. • Board of directors after reviewing the
risk management practices and
activities of Singapore Airlines has not
found anything to suggest that risks
are not being satisfactory managed.
Statement on Risk Management

51. Southwest Airline

52. Company profile
• Southwest Airlines was founded in 1967 and
is headquartered in Dallas, Texas.
• Southwest Airlines Co. provides scheduled
air transportation services in the United
States.
• As of December 31, 2006, the company
operated 481 Boeing 737 aircrafts and
provided service to 63 cities in 32 states.
• It also sells credit to business partners,
including credit card companies, hotels,
telecommunication companies, and car
rental agencies.

53. Executives
• Chairman – HERBERT D. KELLEHER
• CEO – GARY C. KELLY
• President and director – COLLEEN C.
BARRETT
• CFO – LAURA WRIGHT

54. Routes Map

55. Competitors
• AMR corporation
• Continental Airline, Inc.
• JetBlue Airways Corporation

56. South West Airline
Market Share
Market Share
63%
47%
South West
Other Carriers

57. Competitive Strength
Low Cost Leadership
• Productivity is the key
• High asset utilization
• Point-to-point system
• More direct nonstop routings
• Employee Proficiency
• 71 employees per aircraft
• Lowest ratio since 1972

58. Stock Performance

59. Stock Performance
• Last Trade:15.00
• Change: 0.02 (0.13%)
• Prev Close:14.98 Open:14.96
• Day's Range:14.96 - 15.1052wk
• Range:14.56 - 18.20
• Volume:6,448,400
• Avg Vol (3m):7,768,670
• Market Cap:11.83B
• P/E (ttm):24.75
• EPS (ttm):0.61Div & Yield:0.02 (0.10%)

60. Income Statements

61. Cash Flow Statements

62. Cash Flow Statements

63. Risk Factor
• From company’s Annual Report:
• Southwest's business is labor-intensive
• Southwest relies on technology to operate its business and
any failure of these system could harm the Company’s
business
• Insurance cost increases or reductions in insurance coverage
may adversely impact the Company’s operation and financial
results.
• Disruptions to operations due to factors beyond Southwest’s
control could adversely affect the Company.
• Southwest’s low cost structure is one of its primary
competitive advantages and many factors could affect the
Company’s ability to control its costs.

64. Risk Factor
• Jet Fuel
• Unpredictable price movement
• Unable to increase fares when fuel price
rise
• Changes in hedging strategy and the
effectiveness of hedging arrangement
have significant impact on operating
results

65. Risk Factor: Jet Fuel
• Anticipating higher jet fuel prices
• Not as strong hedge position and higher
market price in 2006
• Lower hedge ratio and prices of hedges in
place are higher

66. Purpose of Hedging
• Airline operators are inherently
dependent upon jet fuel to operate,
and therefore, impacted by change in
jet fuel prices
• Jet fuel and oil consumed in 2005, 2004,
and 2003 represented approximately
19.8%, 16.7%, and 15.2% of operating
expenses respectively
• The company endeavours to acquire
jet fuel at the lowest possible cost

67. Hedging Strategy - Jet Fuel
• Hedging Commodities:
• Primarily crude oil
• Heating oil
• Unleaded gas
• Components of hedging positions:
• Call options
• Collar structures
• Fixed price swap agreements

68. Hedging Strategy: Jet Fuel
• Hedge ratio:
• 70% for 2006 at $36/barrel
• 60% for 2007 at $39/barrel
• 35% for 2008 at $38/barrel
• 30% for 2009 at $39/barrel
• Near term hedge positions are in the
form of option contracts
• Limit the cost of rising fuel price and
benefit the company of declining fuel price

69. Value of Hedge Contracts
• As of December 31, 2005, the
company has $1.1 billion derivative
instruments
• $640 million of that was classified as
“Fuel hedge contracts”
• Fair value was determined by the use of
present value methods or standard option
value model with assumptions about the
commodity prices based on those
observed in underlying markets

70. Balance Sheet - Assets

71. Performance of Hedging
• Gains from hedging:
• $890 million unrealized gain, as of
December 31, 2005
• Of that amount, $327 million are expected
to be realized in 2006

72. Balance Sheet – Liability & SW’s Equity

73. Cost Structure
Fuel and oi l
20%
Mai nt enance
6%
Ai r cr af t
r ent al s
2%
Landi ng f ees
7%
Depr eci at i on
and amr t
7%
Ot her
18%
Sal ar i es
40%
Operating Cost per Available Seat Mile (ASM)

74. Cost Control
• To absorb the increasing in Jet Fuel cost, Southwest maintain
its low cost characteristic through reduction in other operating
expenses.
• Reduction in non-fuel unit costs of 1.5%
• Downsized work force and renegotiated collective
bargaining and vendor agreements
• Headcount per aircraft decreased from 74 at Dec 2004 to
71 at Dec 2005

75. Risk Factor 2 – Employment cost

76. Employee Stock Option
• Options granted at
or above the FMV of
the common stock
• 6-12 years terms
• Neither Executive
officers nor
members of the
company’s board of
directors are eligible
to participate
• Options granted at
the money
• 10 years terms
• Fully exercisable
over 3, 5, or 10
years of continued
employment
ESO subject to bargaining
agreements
Other Employee plans

77. • The Company accounts for stock-based compensation
utilizing the intrinsic value method in accordance with the
provisions of Accounting Principles Board Opinion No. 25
(APB 25)
• No compensation expense is recognized for fixed option
plans because the exercise prices of Employee stock
options equal or exceed the market prices of the underlying
stock on the dates of grant. Compensation expense for
other stock options is not material.
• Under the new accounting regulation SFAS 123R : Expected
2006 salary increase is approximately $20 million
Employee Stock Option

78. Employee Stock Option

79. Employee Stock Option

80. Employee Stock Option
An option’s exercise price may be paid
(i) in cash,
(ii) in shares of Common Stock,
(iii) through a cashless exercise, or
(iv) in any other manner permitted by the committee.

81. Executive Stock Option
• Option Exercises in Last Fiscal Year
The following table provides information regarding stock options exercised, and the
value realized upon exercise, by the named executive officers during 2006.

82. Interest Rate risk
Ot her
Pur chase
Ai r cr af t
Pur chase
l ong t er m
debt
Capi t al
Lease
I nt er est
Commi t men
t s
Oper at i ng
Lease

83. Interest Rate Hedging
• Interest rate swap
• Take advantage of short term rate significantly
lower than fixed long term rate
• Objective is to reduce the volatility of net
interest income by better matching the
reprising of assets and liabilities
• “A hypothetical ten percent change in market interest rates
as of December 31, 2005, would not have a material effect
on the fair value of the Company's fixed rate debt
instruments.”

84. Interest Rate Swap
Security Pay Floating rate Receive
Fixed rate
$385 million
6.5% senior
unsecured notes
due 2012
(LIBOR) plus a margin
every six months
Estimated to be
6.46%
6.5%
$375 million
5.496% Class
A-2 due 2006
(LIBOR) plus a margin
every six months
Estimated to be
6.73%
5.496
%
$350 million
5.25% senior
unsecured notes
due 2014.
(LIBOR) plus a margin
every six months
average floating rate
In 2005 is 3.82%
5.25%

85. Interest Rate Hedging
• Investments
• The Company also has some risk associated with changing interest
rates due to the short-term nature of its invested cash
• ST invested cash $2.3 billion
• ST investment $251 million
• “a hypothetical ten percent change in those rates would
correspondingly change the Company's net earnings and cash
flows less than $2 million”
The returns earned parallel closely with short-term floating
interest rates
• Net effect on interest rate
• Increase in interest rate: net +tv effect on earnings and CF
• Decrease in interest rate: net –tv effect on earnings and CF
• FV of interest rate swap as of Dec 31, 05 is:
• was a liability of approximately $31 million

86. Credit risk
• The Company does not expect any of the counterparties to
fail to meet their obligations
• To manage credit risk:
• selects and periodically reviews counterparties based on credit
ratings
• limits its exposure to a single counterparty
• and monitors the market position of the program and its
relative market position with each counterparty
• The Company had agreements with seven counterparties
containing early termination rights and/or bilateral
collateral provisions whereby security is required if market
risk exposure exceeds a specified threshold amount or
credit ratings fall below certain levels.
• held $950 million in fuel hedge related cash collateral deposits
under these bilateral collateral provisions
• decrease, but not totally eliminate, the credit risk associated
with the Company's hedging program

87. Insurance
• Purpose of Insurance:
• protect the Company and its property
• comply both with federal regulations and the
Company’s credit and lease agreements.
• General Coverage:
• public and passenger liability, property damage,
cargo and baggage liability, loss or damage to
aircraft, engines, and spare parts, and workers’
compensation.
• Increasing insurance cost after 9-11

88. Conclusion
It is important to hedge and
hedge appropriately

89. THE END
Any questions or comments are
welcomed!