Shareholder raises concerns about SIA’s 15 years of fuel hedging losses to Prime Minister Lee, as no one takes accountability

The self-proclaimed shareholder of Singapore Airlines (SIA) Group, Lim Seng Hoo, had raised his concerns of SIA’s fuel-hedging losses to Prime Minister Lee Hsien Loong on Wednesday (16 Sept), after fruitless attempts of voicing out the matter to the company and chief executive Goh Choon Phong.

“Dear PM Lee, I am following up on an email that I sent to you a few days ago, regarding 15 years of SIA’s fuel hedge losses, without anyone taking accountability,” he wrote on Facebook yesterday.

Mr Lim forwarded a copy of his letter to SIA and Mr Goh – alongside SIA’s fuel hedging losses history dated from March 2007 to June 2020 – in the post, hoping that Mr Lee would look into the matter.

He had earlier on implored the company to put an end to its fuel hedging practice, given that SIA had a “10-year record of over S$2.452 [billion] losses” as of March 2016. The post had garnered comments and questions from many netizens.

“This is not just COVID-19 but a 15-year practice resulting in incalculable losses,” Mr Lim remarked.

According to Mr Lim, SIA “went big” on fuel hedging after the surge in oil prices at the end of 2007 and also during the collapse of the brokerage firm Lehman Brothers that had led to global financial distress in 2008.

He noted that the airline registered S$348.3 million of losses in 2009 and lost S$558 million in 2010 vis-à-vis NPAT of S$1,148.6 million and S$279.5 million respectively, which he claimed the losses started before Mr Goh was appointed as the CEO of SIA.

Mr Goh joined SIA in 1990 and was appointed as the CEO of the airline on 3 September 2010.

“These hedging losses are recognized in “fuel costs”, hence would be missed out by the average reader. They are only fully revealed in the footnotes under what are charged/(credited) before arriving at the profit figure.”

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. The airline 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.

The airline is currently in a “very deep problem” which stemmed from its fuel hedging practice, said Mr Lim.

“When your accumulated fuel hedging losses reached $1,285.6B [billion] by Y/E [year end] 31 March 2015, I first wrote to you on 12 Aug 2015, also enclosing a 38-year oil price chart (1970 to 2008).

“The following year, your accumulated hedge losses reached $2,452.1B [billion], and I wrote again to you on 24 May 2016,” Mr Lim explained.

Subsequently, Mr Lim had a chance to meet two vice presidents (VPs) of SIA, where he explained to them on “why their reading of the oil market was flawed” and the “secondary dangers” of fuel hedging.

Mr Lim highlighted that levying fuel surcharges longer than the other airlines could result in losses in market share, while replacing older planes too quickly and over-invest in new fuel-efficient jets “may not be feasible or ROI-justifiable [return on investment] at lower oil price scenarios”.

“I also attended the 2010 AGM and pleaded there that this practice [should] be ended before more huge losses arise, repeating the explanations above, including consequential hazards such as buying too many new planes too quickly.

“Then Chairman Mr Stephen Lee, fielded my question, instead of you [Mr Goh], and he said he did not see these losses in the accounts, and the hedges are in some years profitable, while in others unprofitable; to which I looked at everyone looking at me, and said, ‘The Chairman does not know’, and respectfully sat down,” he added.

The Temasek-controlled SIA had scaled down the hedging thereafter, but it later on scaled up again.

“Please do not hide all of these troubles under the cloud cover of COVID-19, just as the 15 years of hedge losses had been in the fine footnotes, so that even your then Chairman said he didn’t know of this.

“But as CEO, you must know of all these losses over 15 years plus what’s up ahead in more hedging losses and plane write-offs,” said Mr Lim.

He reiterated that SIA’s core competence is not fuel trading but airline operations.

“While those on the more affordable basic plan receive more favorable interest rates, the payout amounts fall far short of what is needed for a dignified coverage of basic retirement needs. This is designed to make sure pooled savings can fund all existing payout schemes,” Mr Lim told TOC.

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”, prompting an independent enquiry to be raised as to this practice at SIA.

“This does not yet count hedges for the next 12-18 months that would be unusable unless SIA can fly at 50 – 70% capacity. But your high oil price stance has also influenced your aggressive plane purchases, which will result in significant future losses too.”

Meanwhile, he expressed disappointment with the management and direction of SIA, noting that the “sacrifice of all hardworking SIA staff over the years” will be wasted due to “one strategic blunder”.

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

“If there is now no proper governance-accountability, not just to SIA staff and shareholders but to all stakeholders including your customers, suppliers, and our nation, then we have moral hazard, and no guarantee that this situation for SIA will or can ever change,” he noted.

Mr Lim then urged Mr Goh to step down from his position as the CEO of SIA.

“It is not personal and it is painful for me to suggest this. I have the fullest respect for you, for your dynamism, creativity, and vision for SIA. However, it is a matter of the right thing; and I had thought you would have on your own accord have stepped down, when calling for the S$8.8 billion rights subscription in April 2020.”

He further noted, “After that, the fuel hedging practice must be deeply curtailed if not entirely stopped. My estimate is that when all the other non-utilizable hedges mature, your losses from this practice would exceed S$4B [billion] or even be near to $5B [billion].”

Despite SIA’s current situation, Mr Lim, who described himself as a fourth-generation Singaporean, refused to sell his shares in SIA which he bought when the company first went public in 1985.

“I wish for Singapore, to have the best airline, best airport, and on our roads, a world-class transportation system; and I believe we can achieve all of these! This is why I haven’t sold my shares, and also picked up all my rights, albeit painfully. They were savings for the education of my 5 children,” he said.

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