SIA’s shareholder implores to stop fuel hedging practice; says SIA’s situation will not change if CEO Goh Choon Phong doesn’t resign

Previously in May, Singapore Airlines (SIA) reportedly had lost S$212.0 million for the FY19/20 financial year ending on 31 March 2020, which marks the first full-year loss in the airline’s 48-year history. This was due in part to the US$638 million in charges on failed oil hedges.

What’s more, Bloomberg reported on 21 August that SIA has burned through half of the S$8.8 billion it raised through share sales in just two months despite its planes are grounded amid the COVID-19 outbreak.

Of the S$4.4 billion spent since mid-June, SIA reportedly had used S$1.1 billion towards the funding of operating expenses, settlement of maturing fuel hedging trades and ticket refunds following the cancellation of flights due to the pandemic.

As the aviation industry continues to be hit hard by the pandemic, SIA Group announced on 10 September that it had to cut 4,300 positions and slashed about 2,400 staff across its airlines.

Following that, one netizen, who claims to be a shareholder of SIA Group, wrote on SIA’s Facebook page on Friday (11 Sept) imploring the company to put an end on its fuel hedging practice.

The shareholder, who goes by the moniker Seng Hoo Lim, noted that he had written to the chief executive of SIA, Goh Choon Phong twice on 15 August 2015 and 24 May 2016 “pleading” him to stop the fuel hedging practice, given that the company had “a 10-year record of over S$2.452 [billion] losses” in March 2016.

In the post, he also shared SIA’s fuel hedging losses history from March 2007 to June 2020.

“This assumption of high fuel prices underlying your hedge strategy also meant that SIA had kept its fuel surcharges for longer than other airlines, resulting in loss of market share in various markets,” he wrote.

Fuel hedging is a way of providing protection against fuel price variations by locking in prices for the longer term, so that there would be certainty in the airline’s operation cost. In March, the Wall Street Journal (WSJ) reported that SIA uses an “unusually farsighted approach” to manage its fuel costs.

SIA has hedged some of its fuel costs up to five years out, while others in the industry will generally go with a 1 to 2-year horizon. Of the 33 listed global airlines with fuel-hedging policies, SIA was by far the longest, according to Morgan Stanley research last year.

Meanwhile, Mr Lim pointed out that the strategy will escalate the company’s “tendency to replace all planes too quickly for more fuel-efficient models” and resulting in “over-buying of planes” and future losses.

“As at today, with the ineffective hedge losses, your cumulative hedging losses are already S$3.543B with lots more of expiring ineffective hedges in the next 18 months to come. Plus possible losses on over-ordered plane.”

That said, he noted that Mr Goh should resign before laying off SIA’s employees.

“Although SIA Group needs your continued leadership, you must however be man enough to resign even before you retrench all these staff. This is the true measure of leadership. The buck ends with you and with your current Chairman,” Mr Lim added.

“The situation will not change under Goh Choon Phong’s management”

Mr Lim revealed in the comment section of his post that SIA “went big” on hedging after oil prices escalated at the end of 2007 and also during the collapse of brokerage firm Lehman Brothers that caused global financial distress in 2008.

SIA registered losses S$348.3 million of losses in 2009 and S$558 million in 2010.

“These hedging losses are recognized in ‘fuel costs’, hence would be missed out by the average reader. You have to go to the footnotes to see what are charged/(credited) before arriving at the profit figure, to see this,” he explained.

Mr Lim first wrote to Mr Goh when SIA’s accumulated fuel hedging losses had reached S$1,285.6 billion on 31 March 2015. The second time he wrote was when the airlines’ accumulated hedge losses reached S$2,452.1 billion in 2016.

He claimed that he had spoken to the senior vice president and the vice president of SIA about the “secondary dangers and impact” of fuel hedging practice, and highlighted the matter when he attended the company’s 2010 AGM.

“I think they scaled down the hedging a bit thereafter, but later scaled up again.”

Mr Lim stressed that SIA’s core competence is not fuel trading but airline operations. He pointed out that only traders will gain profit from hedging as compared to the company, adding that “a deeper enquiry should be made as to this practice at SIA”.

Citing the collapse of Barings Bank in 1995 and the China Aviation Oil Corporation Limited’s jet fuel scandal in 2005, Mr Lim noted that SIA’s S$3,543.4 billion losses as of 30 June 2020 has exceeded the losses from both the “fiascos”.

“This does not yet count hedges for the next 12-18 months that would be unusable unless SIA can fly at 70% capacity. But the high oil price view has also influenced SIA’s aggressive plane purchases.

“So SIA is in very deep problem indeed, stemming from and exacerbated by this one single fuel hedging practice,” he noted.

Mr Lim, who described himself as a fourth-generation Singaporean, also shared that he bought his shares when SIA first went public in 1985.

Some of the factors that stopped him from selling his shares were due to his hopes for SIA to become “the best local transportation system in the world”, adding that the shares were initially his savings for the education of his five children.

“It is my hope that SIA will rise like a phoenix from the ashes and be a great airlines again, not only to fly, and give returns to its shareholders, but also returns to our nation, who have invested heavily in Changi Airport, to support and host our national airline.”

However, Mr Lim expressed disappointment with the management and direction of SIA.

Though he acknowledged that SIA’s management “has done many good things”, he noted that all of the hard work of SIA’s employees will be wasted due to “one strategic blunder” and the situation will not improve if there is “no accountability and proper governance”.

“This is why I am asking for Mr Goh to resign,” Mr Lim remarked. Mr Goh who had joined SIA since 1990 became the CEO of the airline on 3 September 2010.

He continued, “After that, the fuel hedging practice must be deeply curtailed if not entirely stopped. It may be fine to hedge up to no more than 20% as a buffer to secure supplies if needed, but not for speculation. The same goes for forex hedges.”

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