Currency Exchange Risk and Capital Market Consideration of Singapore Airlines

This project report discusses the currency exchange risk and capital market consideration of Singapore Airlines. It covers the hedging strategies used by the company to mitigate currency risk, liquidity analysis, cash flow hedges, and capital market policies. The report also includes references to studies and annual reports.

Running Head: Financial Accounting
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Project Report: Financial Accounting

Financial Accounting
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Currency exchange risk:
Singapore airlines are operating its business into 62 international destinations and thus
the currency of different countries are generated and managed by the company. The company
reduces the exchange currency risk by using the heading method. The Singapore airlines are
focusing on the overseas assets altogether so that the foreign revenue generation could be
measured and heading strategies could be prepared accordingly (Pyke & Sibdari, 2018). The
capital expenditure, fuel and the debt repayment are largely denominated in the US dollars
and thus, it is important for the business to maintain a great amount of US dollar in order to
mitigate the exchange losses and currency risk of the business.
Figure 1: USD to SGD
(XE, 2018)
In terms of global economical level and the uncertainty in the global business,
Singapore airlines has to make sure that the enough funds are managed by the company in
order to assure the liquidity level and financial risk of the business. The Singapore airlines are
managing a great bank balance in order to assure that the short term deposits and long term
deposit of the business could be repaid and the debt securities listed outside of the Singapore
market can also be entertained by the business (Lily, Bujang & Karia, 2018).

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Figure 2: Liquidity analysis
(annual report, 2018)
The liquidity analysis of the business represents that along with the time, the current
assets and the funds managed by the organization in order to meet the current debt
obligations have been reduced and it indicates the risk for the business. However, if the bank
balances of the business is taken into the concern than it has been found that the hedging
strategies of the business have been improved at better level (SOTTHISOPA, 2016).
annual report (2018) of company explains that the foreign exchange loss of the
business has been higher in the current year because of the sudden changes in the currency
rate in the US dollars because of that the other revenues of the business have been used to
offset the total loss of the business and now the business has prepared a list of all the financial
and commodity risk which affects the currency risk of the business (XE, 2018). The company
has planned to use the derivatives in order to improve the gain of the business and mitigate
the currency risk of the business.
The largest exposure of the business is from the US dollars, Euro, Australian dollar, UK
sterling pound, New Zealand dollar, Japanese yen, Indian rupee and Korean Won. In all the
currency, surplus is gained by the business except the US dollar. The deficit in US dollar is
generated because of the fuel prices and aircraft leasing cost (annual report, 2018). The
company also hold the cross currency swap contracts in order to hedge the risk and improve
the foreign currency gain of the business.

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Though, the cash flow hedges of the business are as follows which represents about
the total income and expenses of the business in last 2 years:
Figure 3: Cash flow hedges
(Annual report, 2018)
the sensitive analysis on foreign current risk of Singapore airlines depict that the cash
flow hedges assumptions of the business are highly effective and hence it would impact on
the profit before taxation and other cash flow hedges of the business. The sensitivity analysis
represent that the 1% strengthening of SGD against the other currency would improve the
income level of the business at great level. The hedging contracts and the significant changes
in the business would mitigate the financial risk and currency risk of the business.
Capital market consideration:
Capital market consideration of Singapore airlines has been studied further and it has
been recognized that how the strategies and new policies of the business have improved the
market position of the business. The annual report (2018) describes that the financial manager
of the company has made few changes into its dividend policy and the structure of the capital
in order to attract the more investors towards the business.
The current dividend offered by the company is 40 cents where the total earnings of
the business are 75.5 cent. The retained earnings % of the business has been reduced and
along with that the dividend payout ratio of the business has improved (Holloway, 2017).
This policy has helped the Singapore airlines to improve the market share and the trust of the
stakeholders in the business which has improved the demand of the stock in the capital

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market. And with the increment in the demand of the stock, the stock price of the business
has been improved.
Further, it has been recognized that the various positive changes and new projects
have been proposed by the business in the market which has helped the capital market
position of the business to be stronger. The current stock price of the company has been
improved in the month of June but right now, the economical changes and the economical
factors have affected the stock price of the company (Duppati, Scrimgeour & Stevenson,
2018).
Figure 4: Stock price
(Bloomberg, 2018)
Al-Najjar, Aoyagi, Goldstein, Korupp, Liu & Singh, (2017) has represented into his
study that the capital market consideration of Singapore airlines is strong as the strategies and
polices designed by the company are in the favour of the capital market which improves the
market position and the stock level of the company. However, the current changes are not in
the favour of the company and it is important for the business to recognize the main reason
behind these and make strong policy to mitigate that risk from the business.
The study explains that the macro economical factors have affected the capital market
position of the business which would be better along with the time and the changes in the
policy of the company (Pyke & Sibdari, 2018). The market share of the business is still strong
and it would help the business to overcome the financial and capital market issues. The
dividend announcement and the increment in the total turnover of the business would
stabilize the capital market position of the business again. To conclude, few changes are
required in the financial policies to make the capital market position strong.

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References:
Al-Najjar, N., Aoyagi, I., Goldstein, G., Korupp, T., Liu, B., & Singh, S. (2017). Boeing and
Airbus: Competitive Strategy in the Very-Large-Aircraft Market. Kellogg School of
Management Cases, 1-16.
Annual report. (2018). Singapore Airlines. Retrieved from:
https://www.singaporeair.com/saar5/pdf/Investor-Relations/Annual-Report/
annualreport1718.pdf
Bloomberg. (2018). Singapore Airlines. Retrieved from:
https://www.bloomberg.com/quote/SIA:SP
Duppati, G., Scrimgeour, F., & Stevenson, R. (2018). CORPORATE GOVERNANCE IN
THE AIRLINE INDUSTRY-EVIDENCE FROM THE ASIA-PACIFIC
REGION. CORPORATE OWNERSHIP & CONTROL, 329 (pp. 18).
Holloway, S. (2017). Airlines: Managing to make money. Routledge.
Lily, J., Bujang, I., & Karia, A. A. (2018). Exchange Rate Exposure: Does International
Involvement Matter?. In Proceedings of the 2nd Advances in Business Research International
Conference (pp. 99-109). Springer, Singapore.
Pyke, D., & Sibdari, S. (2018). Risk Management in the Airline Industry. In Finance and
Risk Management for International Logistics and the Supply Chain (pp. 293-315). Elsevier.
SOTTHISOPA, M. P. (2016). FUEL PRICE EXPOSURE IN AIRLINE INDUSTRY AND
RISK MANAGEMENT (Doctoral dissertation, THAMMASAT UNIVERSITY).
XE. (2018). USD to SGD changes. Retrieved from:
https://www.xe.com/currencyconverter/convert/?Amount=1&From=USD&To=SGD