It all started when Singapore Airlines (SIA) shareholder Lim Seng Hoo posted his analysis of SIA’s fuel hedging “bets” over the past 14 years on his Facebook page.
Mr Lim even raised his concerns of SIA’s fuel-hedging losses to PM Lee after fruitless attempts of voicing out the matter to SIA CEO Goh Choon Phong. Mr Lim is concerned that no one in SIA is taking responsibility of the company’s continual hedging losses.
“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 (in annual reports) under what are charged/(credited) before arriving at the profit figure,” noted Mr Lim.
He said that SIA “went big” on fuel hedging after the surge in oil prices at the end of 2007 and also during the Lehman Brothers crisis in 2008.
According to Mr Lim’s analysis, in the past 14 financial years from 2007 to 2020, SIA suffered 8 years of hedging losses vs 6 years of gains. However, cumulatively, the losses far outweighed the gains in the 14 years – losses of $3,885.1 million vs gains of $876.7 million, resulting in a net loss of $3,008.4 million ($3 billion).
The airline is currently in a “very deep problem” which stemmed from its fuel hedging practice, said Mr Lim.
Shareholder’s plea fell on deaf ears
As far back as 2015, Mr Lim said he already wrote to SIA warning about the airline’s fuel hedging practices. When in 2016, the accumulated hedging losses hit $2.5 billion, he wrote to SIA again.
Subsequently, Mr Lim had a chance to meet two vice presidents of SIA, where he explained to them on “why their reading of the oil market was flawed” and the “secondary dangers” of fuel hedging.
“I also attended the 2010 AGM and pleaded there that this practice [should] be ended before more huge losses arise,” he recalled.
“Then Chairman Mr Stephen Lee, fielded my question… 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.”
Mr Lim reiterated that SIA’s core competence is not in fuel trading but airline services. But no one in SIA, certainly not its CEO Goh, took him seriously.
Meanwhile, Mr Lim implored SIA not to hide all these fuel hedging troubles under the “cloud cover of COVID-19”. He also 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”.
Mr Lim added that the fuel hedging practices of SIA must be deeply curtailed if not entirely stopped. He estimated that when all the other non-utilizable hedges mature, SIA cumulative net losses from its fuel bets since 2007 would even be closer to $5 billion.
ST questions SIA’s fuel hedging policy
Today, in a commentary piece, Strait Times’ senior transport correspondent Christopher Tan wrote that SIA should start to review its fuel hedging policy (‘SIA should review its fuel hedging policy‘, 26 Sep).
Mr Tan noted that the Facebook post made by Mr Lim has been making rounds on social media, “Charting a performance over a 14-year period from 2007 to 2020, culled from the airline’s own financial reports, Mr Lim Seng Hoo said SIA had lost more than it gained from hedging activities.”
Supporting Mr Lim’s analysis, Mr Tan said, “Its (SIA’s) 2007-2020 fuel-hedging performance brings into question the very practice of hedging.”
Fuel hedging is not necessary wrong. It’s 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.
However, the collapse in oil prices has left companies “over-hedged,” effectively meaning they have bought more insurance than they need. Buying oil from the open market now is even cheaper. But since these airlines have already entered into “future” contracts with sellers, they must pay at the agreed higher oil prices at settlements. So, with or without passengers, airlines which bet on oil futures must honor the forward contracts they signed with sellers.
In better times, hedging losses for SIA was “covered up” by larger operation profits. However, the hedging losses become more “glaring” when SIA began to lose money. In the financial year ending 31 Mar, SIA suffered its first annual loss in its nearly half a century of history. This was due in part to the US$638 million in charges on failed oil hedges.
According to a Wall Street Journal’s (WSJ) article in Mar, U.S. carriers have in general cut back on these financial bets after being wrong-footed by an earlier plunge in oil prices about five years ago. Many airlines instead use customer fuel surcharges as a way to adapt to changing oil prices.
But SIA continues to use oil hedging strategy. Not only that, SIA uses an “unusually farsighted approach” to manage its fuel costs, said WSJ. SIA has hedged some of its fuel costs up to five years out, while other airlines 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.
In fact in Jan this year, SIA said it had hedged the bulk of its expected fuel costs out to March 2025. For the four years from April 2021, it had hedged more than half of its fuel needs based on Brent crude at US$58 to US$62 a barrel.
Though Brent crude prices have recovered somewhat but it is still way below US$50. If COVID-19 continues on with oil prices languishing, SIA will surely continue to suffer more losses over its fuel bets, perhaps all the way to 2024, the year indicated by IATA that travel industry will recover from the pandemic.
Oil hedging: Betting against experts
Like Mr Lim, industry observers have also pointed out that hedging is highly speculative. Many commented that having long hedging contracts for an airline runs counter to the basic principle of fuel hedging. It locks in the airline’s fuel position for an extended period, preventing it from beneficial cost manoeuvres.
In a Wall Street Journal article, its chief executive Scott Kirby said, “Hedging is a rigged game that enriches Wall Street.”
Rod Eddington, former CEO of British Airways, once said, “When you hedge, all you do is bet against the experts in the oil market and pay the middleman… You can run from high fuel prices briefly through hedging but you can’t run for very long.”
But obviously, SIA CEO Goh thinks otherwise.
“So, should SIA review its fuel hedging policy?” asked ST correspondent Tan. “In a word, yes. At the very least, it should rethink its five-year hedge.”
Despite SIA’s hedging troubles, Mr Lim said he refuses to sell his SIA shares 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.
But if SIA CEO Goh continues his betting thrill in oil futures, based on his betting performance in the last 14 years, it’s not known if there would be any education savings left for Mr Lim’s children.