Kachjc

evidence please?
if anything the only reason SQ is surviving is because of the cheaper financing it received due to government backing....

Singapore_Air

That's a very unenlightened comment.

Kachjc

if you were a bank who would be less risky to loan to
an entity backed by the government
or an entity backed by a private organisation....

I think I know who I would be offering cheaper financing to

Nicc HK

Suggest you stick to being a tailor! Apologies but I am going to be a somewhat simplistic here owing to time available.

What you are talking about is taking a forwards position which CX will do to make up for short term unexpected requirements, but that is not hedging.

I work in market data and done a lot of work with commodities and energy pricing. For instance, I am close to what used to be LEBA. There are long term leads going into hedging, especially for oil. It needs to be got out of the ground, refined, then shipped. This introduces the element of time so forward planning is required to secure an adequate supply. There are a lot of other companies, not only airlines, wanting the same stuff, so there is the advance need to lock the supply in, or else potentially find yourself going short.

It is also a highly political commodity. One of the reasons the oil price dropped is because the Saudis and the US manipulated the market. The Saudis by forcing a price drop because of Russian competition and the US through opening up fracking. It is these long term leads that need to be managed, i.e. 'hedged'. The vagaries of the spot market mean there are supply uncertainties, which introduces cash flow volatility, both treacherous to a business like CX.

Hedging is fundamentally sound, it smooths cash flow, unless you get your analytics wrong. Most companies are pretty good. How many other airlines around the world have the hedging problem of CX? It looks like CX’s Treasury was incompetent, and this was a department when run by ‘Fingers’ was red hot. Though we are talking about quite a few years ago. If we knew what positions CX actually took it would not take long to see the errors made and make a better judgement.

Put it another way when you plan your pension, your advisor is working on a 30 year horizon, usually benchmarking against bond market yield. This is another form of hedging. Just think 30 years ago the Soviet Union was still around, China was nothing like today, Margaret Thatcher was at the height of her powers. And in 30 years time? Well for one thing the 50 year HK transition period will be over!

flubber

HK's stock market is strange... CX post a loss of HK$1.25 billion, you'd expect the share price to go down but nope - it's heading upwards...

percysmith

I get what you mean.

The gamble is not in that CX has hedged more than it needed (CX's fuel hedges still qualify for cash flow hedge accounting)
But rather it hedged more than its competitors, which means it stands to profit above its peers when it is right and is trashed when its wrong. While not strictly gambling in the accounting sense, it may be seen as such by investors.

percysmith

Adjusting the hedging loss out of the loss, profit is $5,118m, EPS is $1.3 and the P/E based on 29 Dec price is 9.32

FlyerTalker37

In the stock markets you buy the future. The bad results came from one bad "exceptional event" but that doesn't affect to ability of CX to produce growth in the near term. Moreover the hedge issue was already known and one can consider that this event was already "priced" in CX stock's valuation.
I do not have the tools right now, but you should compare the loss to the analyst's estimates to figure out whether the figure is good or not for the stock on the publication date.

brunos

That is the very good point. Pricing by competition is reflecting their costs.
If everyone gad hedged the same amount at $100, their fuel cost would be comparable and they could not have lowered fares so much. The problem is that competitors hedged less, hence a huge reduction in fuel cost when fuel prices went down. Therefore they offered competitive fares that CX must more or less follow at a loss.

But note that oil prices went from $40 to over $100 in 2011-2014. CX hedges looked good then and generated "profit". I did not read much comments then.
However oil prices went down from $110 in mid-2015 to $30 early 2016. It has steadily recovered to around $60.
Doubling up on the hedge at $30 would have been a great move

As Percysmith said, overhedging relative to competitors is dangerous because you cannot control market prices (fares). The lowest cost airline sets the tone.and fuel is over 30% of cost.

Nicc HK

Indeed you have raised an excellent and intruiging issue. Given the size that created an inflated exposure. Where were CX's risk and compliance controls?

Even if there was a positive outcome the sheer scale of the exposure should have raised management, and also auditors, red flags all over the place from the original hedging. This suggests a systemic failure. The sad fact is internal risk accountability within a corporate's treasury department is not held to the same standard as say a Bank's even though they are effectively doing the same thing. Without seeing the original strategy analysis for the trades, and then the execution, it is hard to say when/if a gamble occured. Perhaps the original strategy was working so well management then decided to double down. Did management over-ride their exposure limits? Did they have exposure limits?

In the financial world there ever stricter benchmarks for risk and exposure performance measurement. How risk is priced, and how it impacts the capital book, is again one of the areas I work with. I am interested in CX's case precisely because it helps with my own business.

percysmith

This is not an unauthorised trade. This is a trade authorised by the highest levels of management. Presumably even Swire and JSS too.

Not exactly external auditors' job to stop clients taking business risks.
I presume everyone up to JSS knew. Then internal auditors couldn't have stopped it either.

Nicc HK

This is my job. I never said it was an unauthorised trade, I questioned the process by which the trades (and there would have been a lot more than one) were executed. In my experience, which is a lot in this field, analysis is conducted, a strategy is formulated, management authorises the strategy, then the guys on the front desk executes. Afterwards there ought to be managed exposure. If you talk to any decent goverment DMO (again my clients) this is risk management.

For Swires, or any other third party, to know in advance of the event would be technically illegal, even in Hong Kong. So the decision making would be internal. The internal audotors job is to flag it, not to stop it. If they failed it (and having good reason) again points to systemic issues.

It is exactly the external auditors job not to stop clients taking business risk, but it is their job to flag exposure.

380Flyer

Khoa, the comment is so true. SQ does get financial assistance in many different ways no visible to many. They are constantly pressured by the state owned investment vehicle along with special favours and financial lines. With SQ's long term hedging in place, if the oil price declines like it did previously, they will be next to get caught out.

With Scoot launched with fanfare, the financial contribution that it is making to the bottom line to the business is not significant that they expected to contribute. I am not enlightened by their foray into low cost carrier business model.

Aus106080

Singapore airlines is a listed company also and I do not see it can get many invisible financial assistance.

However, if you compare the stock price for cathay pacific and Singapore airlines, you will find out cathay stock has outperformed Singapore airlines for both 3-month, 1-year, 5-year and 10-year horizon. If you believe stock price can indicate the future financial performance of the company, Cathay may have a better future than Singapore airlines

christep

Two cycles of Buy CX at 12, Sell at 20 have generated quite tidy sums for me during my time here. We seem to be on the upswing of the third cycle now...