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EXECUTIVE SUMMARY

Singapore Airlines (SIA) started from a single plane to an internationally respected brand, more than 60 years of innovation and service has propelled the growth of SIA to become one of the world's leading carriers with an advanced fleet. In order to know SIA in depth, a minimum 3 years annual report has been read and analysed.

First and foremost, we will identify, analyze and evaluate the types of risk faced by SIA by reading through its annual reports and relevant article and news. For this section, we have identified 19 risks for SIA and categorized them into four parts. They are market risks, strategy risks, operational risks and hazard risk. Examples of markets risk are interest rate risk, foreign currency risk and others. Competition risk, ethical risk and business strategy risk are the examples of strategy risk. People risk and technology risk are the examples of operational risk. Natural disasters risk and terrorist risk are the examples of hazard risk. Next, we will be looking at the relationship between those risks. After that, we will prioritize all the risks base on their severity and frequency. A risk with high severity and high frequency will be ranked highest. However, a risk with low severity and low frequency will be ranked lowest.

Second part, we have discussed how SIA manage the identified risk and the qualitative and quantitative measure that show how successful SIA in managing risk. Each stated risk is complemented by actions which SIA taken to manage its risk. In addition, we provide our own evaluation on those actions taken.

In order to know where SIA stands globally, we compare the performance measurement against America Airlines (AA). AA is the subsidiary of AMR Corporation (AMR) which was founded in 1934. Both companies although operate in different country but there certain similarities between them. There are: both companies are their own domestic largest airlines. Besides that, both companies operate more than one main business.

Nothing is perfect. So, in the final part we recommend some step that we think SIA is able to further improve in. We have recommended on the strategy in holding currency, the concern in future services and many more.

In conclusion, SIA is one of the leading airlines in the world. So, there must be a reason behind this. The subsequent page has further explained in detail what accounts the success of SIA.

RISK INDENTIFICATION

MARKET RISKS

Market risk refers to the possibility of lower revenue or margin due to changes in market condition. These changes occurred outside of an organization thus beyond the control of an organization. For examples, commodity price changes, interest rate changes and general price changes (inflation). Therefore, every company regardless of industry is exposed to some form of market risk. For this reason, market risk is also known as systematic risk. SIA are exposed to the following market risks:

Jet fuel price risk

Jet fuel is a type of fuel for aircrafts with gas-turbine engines. The most common types of jet fuel are Jet A and Jet A-1. These two jet fuels are in accordance with international standards. Generally, all airline companies run their airplanes with jet fuel. Therefore, jet fuel is an inevitable cost component for airline industry. Jet fuel is an internationally traded commodity and it is quoted in US dollar. Jet fuel price is decided by global market forces. Jet fuel prices have been rising stably in recent years or even a past decade until the global financial crisis arrives.

Jet fuel is a major cost component of SIA because it averagely consists 38% of total cost. SIA treats jet fuel price solely as a cost factor but not an investment instrument or opportunity. As jet fuel being a cost, higher jet fuel prices mean higher cost for SIA and this tends to push down the sales (if cost transfer) or suffer lower margin, if SIA does not hedge at all. For this reason, SIA has been hedging its jet fuel price carefully and never been speculating on it for a gain (prudent).

Foreign currency risk

Foreign currency refers to the possibility of value decrease when a currency is exchanged for another currency. Way back in the early 1970s, the Bretton Woods fixed exchange rate system collapsed. Ever since after that, exchange rates of currency are free to float according to demand and supply for various currencies. Incidentally, the mechanism of speculators in the money market or foreign currency market has made the exchange rates more volatile. Foreign currency risks arise when a company has transaction involved with foreign currencies.

SIA is definitely exposed to foreign currency risk because its operating revenue and expenses are denominated in foreign currencies. SIA is involved in US dollar, Euro, Sterling Pound, Swiss Franc, and Aussie Dollar. Besides that, SIA is also involved in New Zealand Dollar, Japanese Yen, Indian Rupee, Hong Kong Dollar, Chinese Yuan(Ren Min Bi), Korean Won and Malaysian Ringgit. SIA yields a surplus in all of the mentioned currencies except US dollar. SIA has a deficit in US dollar due to capital expenditure, fuel costs and aircraft leasing costs that was denominated in USD. Once again, SIA perceive its involvement in hedging foreign currency is for the purpose of lowering cost (prudent). Therefore, SIA sell currency surplus as soon as they are practicable.

Interest rate risk

In simple, interest rate risk refers to the possibility of receiving relatively less interest income or paying relatively more interest payment due to interest rate changes. To illustrate interest rate risk we will create a scenario. We assume there is a company intends to borrow bank loan to fund its new project. The company anticipates the interest rate will be rising in 3 month's time thus the company decides to borrow with fixed rate now. However, after 3 months the interest rate has dropped. The company has ended up paying relatively higher interest payment. Interest rate risk applies to both borrower and lender because interest rate may move in favor or against them. Incidentally, interest rates are mostly determined by demand and supply of money and MAS (Monetry Authority of Singapore)'s monetary policies. Government may intend to stimulate the economy by lowering the interest rate.

SIA is involved in interest rate risk because it has invested in short-term deposits and other interest-bearing financial instruments, both receivable and payable. SIA earns interest at floating rates with its short-deposits at bank. SIA's weighted average effective interest rate for short-term deposits is 1.14 percent annually. SIA faces the risk that interest rate might drop below 1.14 percent. When that happens, SIA is earning relatively less by placing its funds as bank deposits. Instead, SIA should have invested those short-term funds elsewhere. Interest rate could be served a useful economic benchmark. Interest rate is served as cost of capital and rate of return. For example, SIA is likely to be required to pay a higher lease payment if the interest rate (real rate of return) is higher. SIA may subject to additional expense if the interest rate changes.

Market price risk

Market price risk defined in annual report 2008/09 of SIA refers to the possibility to get relatively lower return when price in financial instrument falls. These instruments are referring to available-for-sale investments which are non-derivative financial assets. SIA has SGD655.6 million in available-for-sale investments. Furthermore, 76 percent of SIA's available-for-sale investments are unquoted government securities and 16 percent is quoted non-equity investments. Incidentally, unquoted investments have no active market and its value was determined by valuation models. In this case, SIA is facing the likelihood of getting less return if the market price of those investments goes down (economic downturn).

Counterparty risk

Counterparty risk refers to the probability that counterparty does not honour their obligation in a transaction. As mentioned above, SIA invests their surplus funds in interest-bearing bank deposits and other high quality short-term liquid investments. SIA's counterparty includes travel agencies, airlines and most financial institutions throughout East Asia, Europe and other countries. There is a possibility that SIA's counterparty would default when counterparty face severe financial problem (insolvent in the event of unfavorable market condition or economic downturn).

Liquidity risk

Liquidity risk refers to the probability that a company fails to honour short-term debt obligation due insufficient cash equivalents and short-term credit facilities. In strict version of liquidity risk, it means the chances of not able to convert assets into cash in a timely manner and without loss of value. A company could be earning profit but yet facing liquidity risk (Example, overtrading). It is within toleration if a company is not earning profit but being not liquid is another story. The reason is liquidity risk may be fatal (bankruptcy) in extreme cases. Liquidity risk may arise due to changes in money market. Similarly, poor internal control may result in failure to plan cash flow properly.

SIA's short-term obligation includes notes payable, finance lease commitments, bank overdrafts, trade and other creditors, amounts owing to associated companies and derivative financial instruments, which is SGD3,949 million in total. In contrast, SIA has SGD3,848 million of disposal, cash and short-term deposits. Besides that, SIA also SGD486 million have short-term credit facilities. Furthermore, SIA has Medium Term Note Programmes which enables it to issue notes up to the limit of SGD1,300 million.

Credit risk

Credit risk defined in annual report 2008/09 of SIA refers to the probability that SIA may not able to collect full payment from its counterparty. Credit risk of SIA exists in trade receivable, other receivable, available-for-sale investment, long term investment and et cetera. However, SIA's major concern about credit risk is on derivative counterparty which seems to be most significant. A derivative counterparty usually defaults when the market condition has turned against them (lock an underlying asset at higher price but end up in far much lower price and the loss is massive).

STRATEGIC RISKS

Strategic risk refers to the possibility of an adverse effect from a long-term business decision or judgement. Strategic risk is often associated with management of a company because they are the one who made the vital decisions. SIA has undertaken a series of strategies to grow its business and each of the strategies bear some kind of risks.

Business strategy risk

SIA creates value and its market with its strong brand development. SIA's decent brand was created through a good differentiation strategy contributed by modern technology and quality customer service. SIA's policy is to keep the young fleet of aircraft and adheres to replace older aircrafts for newer and more advanced models. SIA has always been the first to adopt new aircraft types such as Boeing 747 jumbo jets and Boeing 777. Besides that, SIA's customer service is well known because of Singapore Girl, air hostess with good virtues. Therefore, SIA has positioned itself as premium carrier.

However, all of these efforts to build a strong brand do not come cheap. As a result, customer of SIA has to pay more for their luxury and comfortable experience. During economic downturn, most customers are reluctant to pay for better services. This has been proven by decrease in sales of SIA in 2008/09 due to global financial crisis. SIA's business class and first class sales are not satisfying.

The positioning and differentiation strategy of SIA also brought other challenges during economic downturn. The emergence of low-cost carrier competition serves an alternative for SIA's customer to switch their service provider. Competitors with low-cost carrier may really dilute SIA's market share in the midst of a bad economy.

SIA is currently having alliance with other airlines. SIA is a member of Star Alliance, an international airline alliance which provides worldwide reach and convenience to customers. SIA is able to access new markets by having alliance partners. However, there are several potential drawbacks. The alliance partners might be lack of commitment, and having different goals, objectives and strategies. Inability to share risk and lack of trust would be other drawbacks of alliance partners.

Competition risk

SIA is different from most of other airlines. SIA does not serve domestic routes but engage its business by serving international routes. In other words, SIA is facing heavy competition with airlines in other countries. Local airlines in other countries might have the upper hand on the culture aspect thus have competitive advantage over SIA.

Besides that, it is likely that the respective government favor their own national airline more compared to SIA. SIA might encounter problems when it enters into new market such as china because there are government policies on protectionism in other countries.

In order to competing internationally a company needs to be wise in choosing target market. Some airline market might be just too competitive to obtain worthy earnings for efforts paid. For example, Thai airway carries 12 million passenger and 400 tonne of cargo a year. This would be a formidable competitor to dilute some of SIA's earnings in Asian market.

Ethical risk

Ethical risk refers to the possibility that a company may not be in comply with corporate social responsibility or not being ethical. As a reminder, corporate social responsibility is mandatory for each public listed company. In long run, an ethical company builds reputation and confidence in its business partner and in public. This enables more business opportunity as more joint project and loyal customers are likely to be attracted.

SIA uses jet fuel for its airplanes. During the combustion of jet fuel, there are carbon emission resulted. A long airplane flight creates more carbon emission than driving few months of a car. SIA is unfriendly to environment and may certain complaints when environmentalism is being more of concern.

Chart above shows all identified risk being categorized into market risks, operational risks, hazard risks and strategic risks.

OPERATIONAL RISKS

Up to this moment, there is no standard definition for operational risk. Some define it in a broad perspective while others define it in a narrow perspective. According to Douglas G. Holfman, the operational risk in each company varies greatly. Hence, each company may have different definition and each of them should define its own operational risk. Meanwhile, he had also given definition for operational risk in a general perspective. He defined operational risk as risk of lost from business disruption, control failure, errors, misdeeds or external events. Below is operational risk for SIA:

People risk / Human capital risk

People risk is risk of loss cause by act of employee. It exists in every company that employs staffs. This risk arise when company's employee make mistake whether intentionally or not during their working hour. Generally, no one is perfect in this world, human tend to make mistakes and hence this risk is unavoidable. However this does not mean we should ignore its existence, instead cautious measures to be taken to minimize its occurrence. In a very competitive airline industry, SIA is greatly affected by this risk. A small human error can lead to long term adverse effect. For example, whenever its customers have a bad experience with its services, customer can easily switch to other airline service provider. As a result, SIA will loss its business for long run and end up jeopardize its profitability. In addition, people risk also includes the dishonest character in employees so call employee misdeed. Employee misdeed does not result to direct loss of physical assets, but loss of certain assets which is valuable to a company. In any company including SIA, information is a kind of intangible asset that is priceless. Loss of company's information will adversely affect the survivorship of the company especially strategic information. However, this is less likely to happen in SIA as it has stringent safety and security control measure. Furthermore, people risk also can be loss of key employee in a company. In SIA, this risk normally directed to loss of management staff especially strategic management member. Loss of management staff will affect the SIA performance immediately. Idea and thought of staffs is key determinant for SIA's competitiveness. In this ever changing business environment, good ideas and thought is a must for every company, no exception to SIA. For this matter, SIA continuously provide training and motivation to its staffs to minimize the impacts of loss of key employee.

Relationship risk/ litigation risk

It is risk of loss generated from the relationship between company and other entities. Relationship risk arises when a company having affair with other entities such as employee, suppliers, stockholder, creditor, customer and others. Generally speaking, good relationship promotes greater efficiency, effectiveness and profitability, while bad relationship results high litigation cost as well as loss of customer. In services industry, a good relationship with others is far more significant than in other industry. This is because it is more often to have complaint in service industry. SIA which operates under service industry is greatly exposed to this risk, especially relationship with customers. When a customer has complaint about its services, this can easily leads to litigation and the cost of litigation can be extremely high. So, customer complaint should be handled properly. Besides, without a good relationship with customer, you will not surprise that SIA has a declining business. Apart from this, a good relationship with employees is also very important for SIA. In the recession period, it is not uncommon to read news about strike in certain company. Generally, an employee strike can lead to massive losses both tangible and intangible to a company! With the knowledge of its importance, SIA does always ensure a well balance relationship with all its stakeholders.

System, Technology and Processing risk

It is risk of loss caused by break down or failure in system, technology and process in the company operation. Inevitably, such risks always happen in every company. Sometimes it only results to small losses, while other time can lead to bankruptcy of a company. In SIA, system failure happens. You probably have experience in delay in services due to some unknown reason. Actually the delay in services is due to system failure. The system failure might cause by various factors such as computer virus, software problem, outdated system and others. Although this risk happens rarely, however preventive measures should be taken to minimize its impact. Recently, technology risk also arises to SIA. The technology and facility attach to its planes gradually unable to fulfill the satisfaction of it international customers group. Some customer has switch to other airline service provider and lead to loss of customer.

Physical risk

It is the risk of loss caused by damage to or missing of physical properties. Generally, this risk associate to security and safety issue. In SIA, this risk arises mainly because of human factor, employee and public. Most of the time, SIA is facing with problem of missing small items especially facility for its customer. However, because the cost for replacing such items is not material, thus SIA treats such replacement expenses as part of the operation expenses. In addition, SIA is also obsessed with the problem of damaged plane's related machines and tools. Although maintenance has been done frequently, however damage still happen in the ordinary course of operation.

Customer risk

It is the risk of loss caused by the changing demand from customer. The changing demand from customer can be caused by both internal and external factors. For internal factors, it can be service quality, facility available, and others. Meanwhile, for external factors, it includes economy situation, special events, changing lifestyle and others. Recently, SIA is facing declining demand for its services. SIA has experienced its first quarterly loss in its history. The declining demand is mainly due to the repercussion of economy crisis that happened in year 2007. There is a sign where its customers cut their spending in non-essential services and facilities. More and more customers choose to take low cost or economy class flight instead business class flight. Definitely, SIA is having tough time in this moment.

Service quality risk

It is risk of loss caused by varying services quality. SIA which operates under service industry finds difficulty in controlling its service quality. Although, standard operation procedures have been established to monitor its services quality, unfortunately it still varies greatly. This is because services involve human and human is hard to be standardized unless each people has similar characteristic. Hence, to certain extent varying service quality is unavoidable. The varying services have led to customer complaint as well as loss of sales. This is why SIA looks seriously on staffs training and discipline.

HAZARD RISKS

Natural Risk

It is risk of loss caused by catastrophic event. For SIA, the outbreak of H1N1 has deeply affected SIA's sales. There is a drastic drop in sales since the outbreak of H1N1. Public is getting reluctant to travel abroad because this is an airborne disease. In addition, due to the global warming effect, the world climate has changed tremendously. This has resulted various storm and tornadoes that adversely affect the safety for each flight. Both natural disasters will lead SIA to heavy losses.

Regulatory risk/ country risk

It is risk of lost caused by changing regulation and failure to comply that regulation in country in which a business is in. SIA is an international flight services provider inevitably has to comply with lot of regulation set in different country. This risk is typically related to safety issues, which about the airworthiness of its flight. Non compliance to this regulation will result to cease of operation in that country. This will engender SIA loss of a lucrative market.

Terrorism risk

It is risk of loss caused by attack or damage launch by terrorist. SIA which provide air flight services to wide range of customer including high profile person definitely will expose to terrorist attacks. Inadequacy of security and safety management will facilitate attacks by terrorist. Based on our understanding, terrorist attracts not only will result in loss or damage of physical assets, but it also result in uncountable number of casualties. What if it is so unfortunate that members of SIA management are among the casualties, this will seriously jeopardize the efficiency of entire SIA's business operation and the survivorship of SIA will be in question.

THE RELATIONSHIPS AMONG RISKS

The relationship among jet fuel price risk, foreign currency risk and interest rate risk.

In SIA, its jet fuel price risk is not arising solely because of pure fluctuation in fuel price, but to certain extent it is also attributable to foreign exchange risk and interest rate risk. On other words, they are interrelated. For example, when the Singapore dollar depreciate against us dollar, this will increase the jet fuel price in term of Singapore dollar since fuel is transacted in us dollar. The fluctuation in exchange rate between US dollar and Singapore dollar will have different effect on jet fuel price risk, depend on whether Singapore dollar is appreciated or depreciated against us dollar. Meanwhile, SIA's interest rate risk also affects fuel price risk indirectly. According to interest rate parity, currency of country with lower interest rate should be at a forward premium in term of the currency of country with higher rate. Changes in interest rate between Singapore and United State of America will result to fluctuation in their exchange rate. Thus, this will have impact to SIA's jet fuel price risk. (Please refer to Appendix 6 for relationship between jet fuel price risk and foreign currency risk.

The relationship among market price risk, foreign currency risk and interest rate risk.

Just like jet fuel price risk, the market price of SIA's assets and liabilities are affected by foreign currency risk and interest rate risk. Although there is no pure market price change in SIA's foreign assets and liabilities, however their price in term of Singapore dollar may fluctuate greatly as a result of changes in foreign currency exchange rate. Fluctuation in exchange rate will intensify SIA's market price risk. Again, SIA's interest rate risk give impact to market price risk indirectly. The fluctuation in interest rate among different countries will lead to changes in their exchange rate. This in turn affects the market price of foreign assets and liabilities in term of home currency.

The relationship among liquidity risk, credit risk, counter party risk, foreign currency risk, interest rate risk, and market price risk.

In general, the liquidity risk in SIA arises when it is unable to fulfill its short term financial obligation. This risk is interrelated to various other risks identified at above. In event of default payment by its debtors, where credit risk and counter party risk arise, SIA will unexpectedly lose of liquid cash. The result of credit risk and counter party risk will disable SIA to meet its financial obligation in a timely manner. Hence, this leads to liquidity risks. In addition, liquidity risk also may cause by foreign currency risk. This is true especially the depreciation of Singapore dollar against us dollar. All the years, fuel cost make up around 30% to 40% of SIA's total revenues. A sharp depreciation of Singapore dollar will increase SIA total fuel cost and lead to low profit margin. Meanwhile, depreciated Singapore dollar also will result to higher burden to meet its liabilities denominated foreign currency. For these reasons, SIA will have higher liquidity risk. Furthermore, interest rate risk also will have impact to SIA's liquidity risk. Interest rate risk can affect liquidity risk in both direct and indirect manner. In general knowledge, changes in interest rate among countries will lead to changes in their exchange rate. This gives indirect impact to SIA's liquidity risk. While changes in interest rate will also affect SIA's liabilities which termed with floating rate. An increase in interest rate will increase SIA's financial burden. This may cause liquidity risk. On the other hand, market price risk also can cause liquidity risk. A drastic decrease in value of SIA's investment available for sale will increase the likelihood of liquidity risk. Liquidity risk happens when proceed from those assets which is planned to meet its financial obligation became inadequate. Lastly, customer risk which refers to changing in customer demand will also result to liquidity risk. A drastic drop in customer demand for SIA services will cause operational loss. This is normally where liquidity risk arises.

The relationship between people risk and other risks.

Among all the risks identified in SIA, people risk is the most critical one. This risk is interrelated with all other risk, except terrorism risk and natural disaster. No matter how well a company's structure and system is, definitely human errors exist. Human is bound to make mistake, this is where different kind of risk arises, no exception to SIA. From management team to low level technical staffs, errors arise on daily basis. A minor mistake from a SIA's service staff will lead to complaint. This is where service quality risk arises. Meanwhile, a mistake from management team will affect the whole company efficiency and effectiveness. This causes customer risk as well as other devastating risk. All the while, we assume mistakes are made purely because of human imperfection. But sometime mistakes are made with full alert or refer as intentional mistake. With the present of such intentional mistake, this is why people risk in SIA can be related to all other risks identified in SIA.

The relationship among all identified operational risks

Generally, all kind of operational risks lead to inefficient and ineffective of SIA operation. Such risks include people risk, system, technology and processing risk, and physical risk. The existence of above mentioned risks in turn leads to service quality risk as a result of inconsistent service quality. Following of inconsistent services quality, this give rise to relationship risk where SIA may be sued by customer or other stakeholder. When all these risks combine as a whole, this give rise to customer risk where SIA will lose it loyalty customer and end up push SIA into hard time.

Relationship among risks is getting closer and closer to each other. This may because people whom make this happen due to integration of market, globalization and the desire for perfect market. For example, people create crude oil future that may result closer relationship with financial risk in a particular company and this also will even tighten the relationship among other risks like strategy risk.

RISK PRIORITISION

HIGH IMPACT & HIGH FREQUENCY

Jet fuel price risk

Jet fuel price risk is a very significant risk to SIA because jet fuel cost is averagely 38% of total cost, which is significant portion of cost. A dollar increase in jet fuel price per barrel increases SIA's annual fuel cost by approximately SGD46 million, before accounting for US dollar exchange rate changes, and changes in fuel volume consumed. (risk sensitivity analysis from annual report 08/09). From the past decade, fuel price has been on the rising trend. However, the recent global financial crisis have proven that market conditions are changing rapidly and jet fuel price may move in a more unpredictable manner (Please refer to Appendix 1).

Foreign currency risk

Foreign currency risk is another significant risk to SIA. As Singapore dollar strengthen by 1 %, there is a decrease in profit before taxation of 11.6 million and decrease in equity of 16.1 million (risk sensitivity analysis from annual report 08/09, please refer to Appendix 2). As mentioned, SIA involves a variety of foreign currencies and exchange rates of currencies are quite volatile thus foreign currency is rather inevitable.

Interest rate risk

Interest rate risk is quite significant to SIA. Under some assumptions, we derived that an increase of 1 basis point in interest rate would likely to cause an increase of 0.4 million of profit before taxation and an increase of less than a million in equity (risk sensitivity analysis from annual report 08/09, please refer to Appendix 3). Interest rate does impact SIA's earnings because interest rate changes quite frequently (please refer to Appendix 4 for interest rate changes).

Business strategy risk

Very important to SIA as it is the long-term direction of the company and determines the value of the company. Most businesses prosper or ruin not because of the business viability but the strategy they adopted. A wrong decision makes a project being scrapped and causes the company million of losses. A wrong hedging is likely to yield the similar result. Business strategy risk is inevitable and has decisive impact on the company.

Competition risk

As SIA compete internationally, it may face heavy competition with other national airlines. SIA would also face difficulties such as government policies on protectionism, patriotism (target market prefer more on national airline), lack of understanding on different culture and behaviour and so forth. All of these difficulties would make SIA relatively less competitive. Competition between airlines is inevitable and airline compete which is unable to compete may suffer losses on market share.

HIGH IMPACT & LOW FREQUENCY/ LOW IMPACT & HIGH FREQUENCY

Market price risk

Market price risk is not very significant to SIA. 1 % increase in quoted price for available-for-sale investment would cause 6.6 million increases in equity. (risk sensitivity analysis from annual report 08/09). 81% of SIA's available-for-sale investment is government securities so it is likely that no volative price changes for it. The second largest portion (16%) o f SIA's available-for-sale investments is non-equity investments consists of money market funds, commercial papers and credit-linked notes. During the financial year 07/08, SIA recorded 9.7 million impairment lost for its non-equity investment, not a meaningfully large figure. From time to time, market price risk does happen on SIA but it has no very significant impact (Market price risk sensitivity analysis from annual report 08/09, please refer to Appendix 5).

Natural risk, terrorism risk and country risk

Natural risk that includes disasters such as SARS and terrorism risk that includes 911 incidents is quite lethal yet quite rare to occur. Country risk is not very significant to SIA because SIA's target markets are all politically established country.

Litigation risk and technology risk

SIA has advance security and technology therefore has very low possibility of litigation risk, service quality risk and technology risk.

Liquidity risk

Indeed SIA has tight budget (spending on advance equipments and R&D) but it also good credit facilities and ability to raise short term capital. Liquidity risk should not be too trouble to SIA since it still has an amount of short-term investment and can be served as precautionary purpose.

Ethical risk

This risk has no severe impact on SIA as every airline release carbon emission and public has accepted this fact due to lack of choices. Until there is new technology which entirely removes carbon emission, airline would not subject to serious public objection and complaint although it is environment unfriendly.

Human capital risk, physical risk

To err is human. Human capital risk is inevitable but SIA is able to minimize its human capital risk within a reasonable range. Physical risk is also inevitable because of engine and parts exhaustion but SIA is able to minimize this risk with decent technology and control system. Therefore, these two risks are not very significant to SIA.

MODERATE IMPACT & LOW FREQUENCY

Counterparty risk, credit risk and service quality risk

Both counterparty risk and credit risk has low likelihood (firm credit rating) to occur but it has tremendous effect once it really happens (economic downturn). SIA uses its derivatives for the purpose of risk management (not speculative) thus gains and losses arises offset each other. Therefore, chances that significant loss arises from the non-performance of counterparty are very low. SIA has carefully managed its service quality thus has low service quality risk.

Customer risk

Customer risk has proven its impact on SIA. The recent quarter loss of SIA is partially contributed to weaken economy due to global financial crisis. This risk does not happen very often and is long term in nature. The effect of customer risk tends to affect SIA in longer term rather short term.

RISK MANAGEMENT AND EVALUATION

A particular of risk can be further categorized into low, moderate and high risk. For example low technology risk which is adsorb by SIA, moderate technology risk is shared between employee and company, High technology risk is managed by SIA.(Example is shown in appendix 7) The existence of information asymmetric, information available to us is usually has significant effect to SIA. However, those low and moderate risks are not well disclosed by SIA and this may have significant impact to the company if their effects are combined. Besides, the completeness of the disclosure of some of the significant risk is questionable. The reasons above may lead to a bias analysis on risk management.

MARKET RISKS

Every multinational company is hard to avoid itself from market risks exposure as they involve in various business activities that will be affected by fluctuation in market prices. Changes in interest rate, jet fuel price and foreign currency are among the market risks faced by Singapore Airlines (SIA). In order to mitigate and control these risks SIA has adopted different approaches in managing different kinds of market risks.

Jet Fuel Price Risk

In dealing with jet fuel price risk, SIA has relied on swap and option contracts. A hedging period of 18 and 24 months forward are usually done by using swap contract. While, option contract is used to hedge jet fuel price for a period of 18 months forward. Besides, sensitivity analysis has been adopted by SIA in analyzing the degree of profit that will be affected by the changes in jet fuel price. Base on the analysis, we can know that for every one dollar per barrel increase in jet fuel price, SIA will increase in equity by 14.3 and vice versa. (Jet fuel sensitivity analysis is shown in GENERAL Appendix)

Evaluation

The peak of oil price is around June 2008 and reaches to about USD140 per barrel. A huge increase in crude oil within short time period might be the main reason that causes price level of goods and services to increase. And the introduction of higher surcharges that will likely to reduce company revenue. Besides, follow by financial crisis that cause company's sales grow unlikely. A vulnerable market condition, SIA might hedge wrongly at higher price that result in higher fuel price cost for the year ended 2009 and unable to benefit from the oil price plummet to about USD40 per barrel. The hedging in jet fuel price during the financial ended 2009 was not effective. It should be better if the SIA does not do any hedging in fuel price because the peak of oil price was only temporary. (Jet fuel price chart is shown in appendix 8)

Foreign Currency Risk

It is crucial to manage foreign currency risks because it is one of the significant risks that SIA faced. About 63% of total revenue and 69% of total operating expenses are denominated in foreign currency. SIA has established a cost center in managing currency exposure. Which means SIA does not take any speculative position in hope of making a profit. SIA has adopted a policy of matching, where receipts and payments in same currency are offset and the remaining surplus is hedged and converted in US Dollar or Singapore Dollar (SGD). In addition, SIA has used forward and option foreign currency contracts to hedge part of its future foreign currency exposure with settlement date stretching from one month to one year. A sensitivity analysis has been used by SIA to aware the impact of changes in currency. According to the analysis, for every 1% strengthening in SGD against other currencies, the profit before tax and equity will decrease by 11.6 and 16.1 respectively. (Foreign currency sensitivity analysis is shown in GENERAL Appendix and Appendix 2)

Evaluation

SIA was poor in hedging foreign currency exposure in financial year 2009 as shown in one of its note to the accounts (Fair value reserve). The note indicates that pervious year SIA gained SGD87million in foreign currency compared to this year SIA loss SGD69.4million. However, this was inevitability due to most of foreign sales are converted into USD or SGD. And during the financial year 2009, United State of America was facing serious financial turmoil and caused US Dollar to weaken against SG Dollar. Therefore, result in foreign currency losses after US Dollar was converted back to presentation currency.

Interest Rate Risk

SIA earnings will also be affected by the fluctuation in interest rate due to the change in interest income and interest expenses from short-term deposit, and other interest bearing assets and liabilities. SIA has relied on interest rate swap and interest rate cap contracts to reduce interest rate cost on its financial assets and liabilities. Besides, sensitivity analysis has also been prepared by SIA to identify the impact on profit before taxation. Based on the analysis, for every one basis point increase in market interest rate, the profit before taxation will increase by 0.4. (Interest Rate sensitivity analysis is shown in GENERAL Appendix and Appendix 3)

Evaluation

During the financial year 2009, SIA was good in hedging the fluctuation in interest rate. This can be shown in Fair value reserve note to the account. It indicates that the interest rate swaps contract gained SGD3.2million compare to last year where SIA loss SGD1.2million. This gain was mainly due to most of the large economic countries had reduced their interest rate to tackle the financial crisis. The USA has reduced its interest rate to almost 0%. Singapore government has also reduced its benchmark interest rate to as low as 0.06% on December 2008.

Counterparty risk

Usually the surplus funds of SIA are invested in interest-bearing bank deposits and other short term high quality instruments. To reduce this risk, SIA limits the aggregated exposure on all outstanding financial instruments to any individual counterparty and taking into account its credit rating. SIA evaluate and review this exposure regularly and will make adjustment accordingly as necessary.

Evaluation

SIA is good in managing counterparty risk as this can be shown by SIA invests in high quality interest bearing instrument over many parties. This is to avoid putting eggs in only one basket. Besides, rating will also give clearly the healthy of the party and thus will be able to reduce counterparty risk effectively.

Liquidity Risk

In order to ensure liquidity risk is under control, SIA will hold sufficient funds available to meet cash outflows such as to cover the cost of all firm aircrafts deliveries due in the next financial year. Besides, SIA ensure it assesses to bank borrowings or public market funding easily to meet unexpected cash outlays. The policy set by SIA is in line with the funding policy of other major airlines.

Evaluation

SIA holds SGD3billion in cash and bank balance, which is a huge amount of cash. However, the current ratio of SIA for the year 2009 is 1.16x (6.8/5.9) which is lower than previous ratio of 1.43x (8.3/5.8). This declined in current ratio was mainly due to the reduction in receivables and used to repay long term liabilities. The decreased in receivables was due to economic downturn where demand of flight reduce. During this crisis, SIA reduced its loan by about SGD200millon, which is a wisely move. Overall, the steps to mitigate liquidity risk are good.

Credit Risk

There is no significant concentration on credit risk management by SIA other than on derivative counterparties where transactions are limited to high credit quality financial institutions and hence the risk of default is low. The sales of SIA are achieved through IATA accredited sales agent. The credit risk of this agent is small owing to its broad diversification. Besides, receivables and payables are settled either bilaterally or through IATA clearing house. Receivables and payables are basically netted and settled at weekly basis, which greatly reduce the risk of default. For all other service relationships, depending on the scope of services rendered, SIA will requests collateral and credit reports from clients with the intension to know their payment behavior. This will probably reduce credit risk.

Evaluation

Receivables only represent 10% of the total sales. This indicates that most of the sales are in cash term. Besides, the SIA is confidence that non performance of receivable will only represent small portion which is acceptable. SIA adopted risk acceptance in managing credit risk which it is a good step as this balances cost and benefit.

STRATEGIC RISKS

SIA has been always positioning itself as a world class carrier. This is mostly related to strong brand management driven by the board members and top management. For examples, SIA was the first to introduce hot meals, hot towels, free alcoholic and non-alcoholic beverages, with a unique and patented scent, personal entertainment systems, and video-on-demand in all cabins to differentiate it from other international airlines.

To compete with other airlines, SIA aims to maintain the youngest fleet of aircraft among other major airlines and follows to the stringent policy of replacing older aircrafts for better or newer models. This will give a perception a more safety carrier to customer and will also enhance the competitiveness of SIA. For examples, SIA has been the first to take the delivery of new aircraft type like Boeing 747 jumbo jets, Boeing 777, and also the first airline to fly the Airbus Super jumbo A-380 in 2006.

The slow down of the economic and the increase competition among airlines, SIA has introduced SilkAir to tap into different market. Basically, SilkAir aims as a regional wing of SIA and serves short-haul destination. It provides flight services from Singapore to around 31 cities in china, South Asia, Southeast Asia and others. SilkAir offers flight services at a low price to compete with other low cost carriers.

Not only that, SIA has been setting various stringent policies to be follow such as flight safety policy, security policy, quality policy, environmental policy, safety and health policy(SIA annual report, 2003). This is one of the strategies to make SIA as a world class carrier and differentiate from other carriers.

A good strategy adopted by SIA can greatly reduce strategy risk and it also increases the competitiveness of SIA and thus reduces competitive risk.

Evaluation

Overall the strategy adopted by SIA was good as this can be shown by the effective change in strategy to adapt to changes in economic environment without losing its competitiveness. For example, the introduction of SilkAir is to tackle the competition from other low cost carriers.

OPERATIONAL RISKS

We have identified the operational risks that occur in SIA which will result adverse outcome to the company. So, it is very essential for SIA to manage it in order to reduce the negative impact on the company. Each company has their own management style although they may be in the same industry. It is because each company will select management style which will effectively reduce the adverse outcome in a cost effective method.

People risk / Human capital risk

People risk is the biggest challenge in terms of management. It is because people are creatures that have a very unique mind which allow people to think and to evaluate. So, the power of think is the major causes of adverse outcome when compare to robot, people tend to do mistake. People create problems but a company still needs them to run it. It is because company is an artificial person which need people or human being to run or may be technology is not advanced enough to eliminate all the people. Since we cannot eliminate them, we need to manage them to reduce the unwanted events. Action that has been taken to manage the people risk SIA has adopt and follow good corporate governance and Singapore exchange limited listing requirement rules likes the setup of many types of committee board, composition of the directors board members and many more. By adopting this rules and regulations and practice this can help to reduce the people risk

Besides that, education and knowledge allow people to think in positively and this directly and indirectly can reduce the fraud or mistake in SIA. This can be shown by SIA worked closely with relevant agencies to continue staff development likes Skills Programme for Upgrading and Resilience (SPUR) scheme offered by the Singapore Government (Pg.18, SIA Annual Report 2009). This scheme can help to improve efficiency at the workplace and reduce the mistake in SIA.

Next, workers unions are able to help SIA management team to have better communication with their employees. With good communication platform, this is able to reduce the mistake and increase the efficiency of the company. For example, 19 June 2009 the Air Line Pilots Association, the Singapore Airlines Staff Union (SIASU) and the Air-Transport Executive Staff Union (AESU) have sign some agreement to reduce SIA cost to help the company to go through this recession. This can show how a good relation and effective discussion.

Evaluation

The above mentioned risk management process that has been taken by SIA to reduce the people risk is good but there still have some rooms to improve. It is because people are hard to manage and predict. So, a good recruitment system also play a major role in reduce the people risk. For example, right person in doing the right job can greatly reduce the people risk in the workplace. So, do it right in the first place by recruiting the right person.

Relationship risk/ litigation risk

The relationship risk here is more focus on the other stakeholders like suppliers, creditor, environment but not customers. It is because customer will be critically discussed in customer risk. A good relationship with other stakeholders can smooth the whole process among SIA and other stakeholders. The action that has taken by SIA in managing some of the stakeholders is likes to reduce the supplier problem by internalize most of the important division. For example, internalizing the maintenance, catering and in flight services (e.g. of subsidiaries SINGAPORE AIRPORT TERMINAL ERVICES LIMITED,SILKAIR, SINGAPORE AIRLINES CARGO and SIA ENGINEERING COMPANY) can greatly reduce the cost and increase the quality of the products and services. It is because the subsidiaries share the same value as the SIA. Since, the suppliers have been internalizing. So, problems also greatly reduce like court cases also reduce. This also can create a win-win situation for SIA and the subsidiaries by secured contract from SIA and SIA get the quality with reasonable cost. A part from that, subsidiaries are able to boost their profit by accepting third party contracts.

For the environment, SIA is shutting down the engine 3 during taxi. This is able to reduce noise, the fuel consumption and gaseous emissions (Captain Gopala Subramaniam). Next, to reduce the used of energy, SIA has take initiative to make the condition of the air and the ground become better by introducing lightweight meal carts and service ware; using more energy efficient lightings, reflectors and motion sensors at the workplace to reduce energy use; enhancing engine wash to improve fuel efficiency and many more (Pg.21 SIA Annual Report 2009). Since, SIA take good care of the environment, this will reduce compliant and reduce the chances of SIA being sued by others.

Evaluation

We think that SIA has done the right job in maintaining good relationship among other stakeholders. Companies that maintain high standards across the full spectrum of their social, environmental and economic performance have shown that they attract the best people enhance the motivation and commitment of their employees and sustain the loyalty of their customers (Pg.2, Report to Society, Rio Tinto, 2004). This subsequently result better company profit and reduce number of court case.

System, Technology and Processing risk

The advanced in technology has greatly reduce the adverse outcome in SIA like system failure. While, this has help SIA improve efficiency in dealing with customers and internal affairs. Although, advanced technology is used by SIA but the chances of the system failure still exists. So, SIA has internal technology department that help to recover the failure system as soon as possible to reduce the impact. Besides that, SIA will critically analyze the potential partner before they decide it. For example, SIA selected the Amadeus Alta Customer Management Solution (CMS) after an exhaustive and detailed evaluation. SIA will replace passenger service systems with Amadeus' suite of solutions that is responsible to help drive all sales and reservations, as well as manage its global inventory and departure control operations. Next, the system is always keep maintains and keep upgrading to meet the global trends while system failure get to reduce. Lastly, before a system being implement it will keep on testing to make sure it is 100% fit.

Evaluation

We think that the technology risk has greatly reduced by a good management team and the reliability of technology equipment. It is because they are able to identify the risk and tackle the risk with a good resolution.

Customer risk

SIA is a company that provides services. So, customers are the major factor that will determine the successfulness of SIA. Various ways has been undertake by SIA in order to reduce the customer risk. A total of $1 million cash value is offer and rebated back to the community to support charities, educational and many more. This action can help to improve the SIA image and indirectly attract more customers to select SIA as a primary airline to abroad. Community that have benefit from this action are that Singapore Chinese Orchestra (SCO), Singapore Dance Theatre (SDT) and Singapore Lyric Opera (SLO) (Pg.22 SIA Annual Report 2009) .In addition, frequent promotion and discount is offer back to customer to attract them when market condition is unfavorable or as a token of appreciation for loyal customers.

Evaluation

SIA is well known with good services. So, we think that the customer risk is well manage and this also is one of the reason why SIA so profitable.

Service quality risk

SIA is one of the most profitable and world leading airline which has won a lot of THE BEST Award like the best airline, best business class and many more. This can show that SIA has put a lot of effort to make this come through. Next, the compliment and complain is head by a vice president with responsibility to on it. Moreover, SIA take complain seriously, they want learnt from mistake and find out the problem and recover it. (Pg.14, Wirtz & Johnston). Besides that, services involve many staff. So, SIA place high emphasis on training to make sure all the cabin crew will deliver good services. Lastly, SIA will recognize those staff that has received a lot of compliment by giving special badge during ceremony and will also put it the SIA newsletters to appreciate the effort that they has done it.

Evaluation

SIA is well known as a world leader in services. To have this successful outcome, a lot of researched and effort has done. So, we think that the services quality risk has well manage by SIA.

HAZARD RISKS

This risk is very uncertain which mean is very hard to predict. So, hazard risk management is hard to manage. Company is only able do what is necessary to reduce the losses from that risk but not able to fully overcome from it.

Natural disasters risk

H1N1 and SARS are natural risk that may affect SIA badly. So, no matter how good the risk managements are it may also not able to fully recover from those natural disasters, what we can do is to reduce the effect only. For example, SIA in managing the recent H1N1 only able to reduce the risk but not able to fully recover from that because customers still scare no matter how good the risk is manage. SIA distributed Frequently-Asked-Questions on swine flu on flights, health kits containing a thermometer, masks and antiseptic towels will be provided to all customers on board flights to the United States are some of the ways that SIA has taken to reduce the risk.

Evaluation

Some natural disasters are hard to predict. So, SIA has done what is necessary is consider good for it. Just that, when people started to fear, everything planned may go wrong if the disaster is uncontrollable. So, proper education and contingency planned must prepared in advanced.

Regulatory risk/ country risk

SIA is operating in Singapore and Singapore is one of the safest countries in the worlds meaning low country risk. According to Business Environment Risk Intelligent (BERI), the profit opportunity recommendation ranking (POR) is able to provide general level of political risk in a country. POR March 2007 has rank Singapore second place with the score of 79 over 100 and Singapore is rank behind Switzerland which has 82 points. According to the fact, the country risk is consider no that material for SIA.

Evaluation

Clear management is no required since Singapore is a country with low risk. Besides that, Singapore government and SIA are depending on each other to success. So, the policy set by government will critically evaluate before it implement.

Terrorism risk

Terrorism risk is not that critical for SIA. It is because SIA try not to provide services to area that have high chance of terrorism activities. If the demand is great, the management will start to evaluate and consider before decide it or SIA will no land their aircraft in secondary airports which may have lower security is that area. Besides that, US Military is work closely with Singapore government. A lot of activities like maintenance, repairs, of US navy ship and crew rest and recreation. All this activities will greatly reduce the chance of terrorist attack in Singapore.

Evaluation

Singapore government has done their major part in securing Singapore as a safe place. So, SIA only plays some minor role in further ensure their customer by not providing services to those terrorist country. As both parties help each other this has become a good risk management.

INTRODUCTION TO KEY PERFORMANCE INDICATORS

After critical evaluate and identify the risk management taken by SIA. We find that most of the risk has taken well by SIA. So, this is why SIA is well known in the airline sectors and even outside it own industry. Now, we proceed to measure how superior is SIA in managing risk when compare to its peer.

Basically, there are qualitative and quantitative in measuring the superiority of the SIA. A good risk management strategy will result both qualitative and quantitative to be good also.

QUALITATIVE INDICATORS

Awards

Just the recent financial year 2009, SIA has received more than 100 awards from all around the world likes capital magazines; Germany has prized SIA "Intercontinental Airline of the Year" at April 2008 and the rest of the awards regarding best airline and best services can be find in SIA Annual Report 2009 page 27 and 28. All this awards are the result and effort that has undertaken by SIA in managing risk and ultimately make SIA to perform well. (Awards & examples of risk that successfully reduced are shown in Appendix 9)

Board Members

Board quality is very important for a company. It is because board members will set a lot of strategy which will determine whether a company wills success or not. SIA has a good board. Its chairman STEPHEN LEE CHING YEN graduated from Northwestern University, Illinois with MBA. Besides that, Mr. Lee also board members for others well know company. The flying colour background is not only applicable to him only but the rest of the board members and management. For example, there are director graduate from Harvard University which is the number one university in the world and some with first class honor and there are also people obtain professional qualification like Association of Chartered Accountants. SIA board consists of people that come from different culture, different background, and different fields. This will allow SIA has a lot of different input from all this directors that will result better judgment and this will also result SIA to have a very overall risk management strategy which will ultimately make SIA the best airline in the field.

Corporate Governance

Good corporate governance will help to reduce a lot of risks like operational risk, financial risk and even strategy risk. It is because corporate governance is set to help company to have a good internal system to reduce risk of the overall company. SIA has show good corporate governance by reporting and following some the best practice which can help to reduce problems. For example, the chairman and the CEO position are own by 2 separate persons. Besides that, the detail in disclosed of directors background. Moreover, the committee in the board likes remuneration committee, executive committee and many more. The compositions of the board mainly are independent non-executive directors.

QUANTITATIVE INDICATORS (Ratios are shown in appendix 10)

Successful in managing and control risk will in turn increase company's earnings, productivity and investors' confidence. In order to evaluate and measure these effects, we have chosen profitability ratios to evaluate company's earnings, the efficiency ratios to measure company's productivity, and market ratios to measure investors' confidence.

Profitability Ratios

Net profit margin indicates the ability of the company to generate income from sales. It implies the effectiveness of the company in implementing its pricing strategy and as well as the cost control strategy. This is because good pricing strategy will help in generating more sales and good cost control plan will result in bigger portion of the sales turn in income. SIA has a decreasing trend of net profit margin that is from 19.51% in year 2007 decrease to 9.33% in year 2009. This happen due to some factors, firstly, the crude oil price has started to have significant effect from year 2006, where the crude oil price has increased dramatically from USD50 per barrel to as high as USD140 per barrel in year 2008. Fuel cost represents an average 35% of the total sales over 3 year period and thus affecting profit. Secondly, the introduction of higher surcharge on passengers to tackle the oil price increased cause demands of flight decrease. Thirdly, financial crisis hit during year 2009 that cause the demand of flight decline further and sales growth unlikely. Finally, ineffective hedging instrument, as the crude oil price keep increasing, no matter how the company hedges, the fuel cost will still increase.

As SIA is compared to America Airlines (AA), this shows that SIA was more profitability then AA. This can be proof by AA has a negative net profit margin of 8.71% in year 2009, while SIA has positive ratio of 9.33%. This shows that SIA was better in handling risk compare to AA during economic contraction.

Return on assets (ROA) is used to measure the profitability of a company relatively to its total assets and it gives an idea of how efficiency the assets are used by the management. It is more meaningful when ROA is compared over a period of at least 3 years because it shows a trend of performance. An ideal company is a company where it can maintain ROA at high level over a long period of time. ROA of SIA has decrease from 11.94% in year 2007 to 6.45% in year 2009. This indicates that SIA has a decreasing trend of ROA and shown that the performance has decline due to decline in profit.

AA has a poorer ROA compared to SIA. This may be due to more intensive competition faced by AA compare to SIA and financial crisis was started in USA where the impact of contraction was more serious. As a result, AA has a negative ROA of 8.23% while SIA has a positive ROA of 6.45%.

Efficiency Ratios

Load factor that can directly show a company success in manage risk. A good risk management will result the load factor to be high because of low service quality risk, low customer risk and low competitive risk and many more. Load factor generally show how many seat taken up rate by a plane. SIA generally load factor is considered high in this industry. The trends is roughly maintain roughly around 80% but in year 2008 in roughly drop to 76% this is due to H1N1 or Natural risk and customer risk which is not diversifiable away no matter how good SIA manage this risk.

When SIA which financial year ended is 31 March 2009 compare to America Airline which is ended 31 December 2008 is slightly different but the trend we can see is that in the year 0f 2008 is dropping id also due to the both above mentioned risk which is affect not only Singapore but the whole worlds. Generally, the America Airline is slight better than SIA in terms of load factor but which company may doing better in bottom line with greatly depend on how the they mange the cost and the revenue per passenger.

The Revenue passenger-km is not used because the currency use by both companies is different and if we convert one of them will become unrealistic. It is because it cannot fully reflect the situation where the company is operating. So, we amend it to become growth which can better reflect both companies' situations.

In year 2008 the negative drop in SIA and America Airlines (AA) is also due to natural risk which is H1N1 and customer risk which customer loss confidence on Airline Company. So, this result the negative drop for SIA in year 2008 and a greater huge negative growth for AA in year 2008.

The growth rate for SIA generally is better than AA it is because the ASEAN market is getting better due to increase in business activity among ASEAN and the household disposable income is getting high among ASEAN. While USA market is more mature which also have a lot of other competitors compete with AA to share the market which are already mature and result the growth rate become so inconsistent.

Market Ratios

Price to earnings ratio (P/E) can be used to measure investors' confidence level toward a company. As the P/E increase, this indicates investors' confidence increase as well. An increased confidence can be due to certain reasons, such as larger future earnings, good risk management and others. Although profitability of SIA has decline, investors still confidence about the company. This can be shown in the growth of the P/E ratio by 20% that is from the 4.66x in year 2007 increase to 5.58x in year 2009.

This increased P/E might be due to the good risk management effort has been done by the company. Besides, SIA is still one of the best air carriers in Singapore or even the world and it is owned by Temasek which is also a majority shareholder. Temasek Holding is a sovereign fund which is controlled by the government and this indirectly will also boost investors' confidence.

RECOMMENDATION

The Next "Wow" challenge in service quality

The SIA is well known with good quality services that also make it a profitable company. The services quality seems like a good factor but it also has the down side. The down side is that if the other company able to mimic the quality that SIA persist and this will result SIA loss the competitive advantage in the future. So, to avoid this problem, further development and research in services should be done more critically and more details in order to meet higher future expectation by the customers and subsequently able to reduce service quality risk and customer risk.

Besides that, as a good quality company, customers will expect high from SIA in many aspects. So, minor problem may result great reputation to be destroy. In order to avoid this problem, all procedure like recruitment, training, operational and others should be done in precisely to get the overall good outcome. This good quality services will indirectly increase the operational risk since most of the procedure will become tougher but if SIA able to go through it the customer risk and service quality risk able to reduce.

Natural disasters a usual scene

The world is keep changing, natural disasters are more frequent to be happen and the time to recover from disasters becomes longer. This natural disaster will affect SIA badly due to increase in consumer risk which means people loss confidence on SIA services that result from natural disaster This natural risk will result negative strong impact on SIA financial condition like cash flow problem, excess of employee and negative profit. So, this unexpected event should be take consideration by SIA management team in order for management to go through the event if it happens. Ways like contingency plan, retain excess cash flow to be use during the event and additional policy can pre-setup to tackle this kind of problem. One of the lessons that we can learnt from the H1N1 cases is that SIA can pre-setup policy like no paid leave or each staff should take leave each month or otherwise during recruitment agreement.

Holding a more diversify foreign currency

Most of the sales from SIA are converted into either US Dollar or Singapore Dollar. The likely depreciation of US Dollar are high due to several reason, firstly, US dollar depreciation is mainly because of the slowdown of the domestic economy. The US economic problems have changed the global economic situation and have led to a change in the floating direction of foreign investment is another factor that caused depreciation of the US dollar. Besides, reason for the depreciation of the dollar was market speculation on foreign reserves. It was anticipated that some countries with large foreign exchange reserves in US dollars would be looking to reduce their US dollar reserves. Besides, there is also a possibility of crude oil trading mainly on Euro Dollar in the future. To overcome this problem, SIA has to hold a diversified portfolio of strong currency such as EURO Dollar, Chinese Ren Min Bi with potential of appreciation in the future. This will allow SIA to buy fuel at lower cost even though US Dollar does not depreciate.

Jet fuel price is going to hike

As mentioned before, jet fuel has been a rising trend for the past decade. Possibly SIA has share the same thought thus hedge its jet fuel price to protect itself from higher fuel price. However, SIA has suffered a hedging loss due to sudden decrease in jet fuel price caused by global financial crisis. Recently, the economy shows the sign of gradual recovery. Jet fuel price is likely to rise again. It is advised that SIA should hedge its fuel price against the potential rise of jet fuel price even longer meaning that if possible more than 24 months.

Improve transparency and disclosure

After in depth analysis and research, we find that there is room for SIA to make improvement. Based on the information available to us such as annual reports and online articles, we personally think that SIA is not good enough in term of transparency and disclosure. Many risk which we able to identify is not disclosed in its annual reports. For example, competition risk, natural disaster risk, terrorism, service quality risk and others. Besides, the way how SIA manages its risks is also not disclosed in its annual report, not even in brief explanation. One might argue that such issue is business secret and should not disclose to other. However, do you know that high transparency and disclosure is also one type of risk management? It is commonly knows that the ultimate objective of risk management is to enhance and sustain the value of a company and high transparency and disclosure do able to achieve such objective. With greater transparency and disclosure, this can increase and intensify investors' confidence. This is because the value for any company is estimated based on the information available, the more information available to investors or in others word, the more transparent and disclosure, the more precise and accurate value estimated to a company. In addition, it is widely know that investors are risk averse, they prefer high certainty rather than low certainty. Hence, information is vital to them to value a company. With greater transparency and disclosure, a company is highly valued than those with low transparency and disclosure. Hence, we would like to recommend SIA to improve its transparency as well as disclosure in its risk management practices. Hopefully, this will able to increase its company value in term of share price as well as reputation.

Adopt a more holistic and proactive approach in risk management

Based on the recent SIA's income statement, it has recorded quarterly losses. We all know that such losses were mainly due to global economy crisis as well as the outbreak of A H1N1. However, to certain extent such losses were also partly attributed to imperfection in SIA's risk management. In our opinion, SIA is not practicing holistic approach in managing its risks. Its risk management is more like one to one approach which means that treating each risk individually. We strongly believe that the losses incur partly because of failure to evaluate and manage the impact of the above said risks when they occur together or in other words, failure to manage the relationship among different risks. May be our opinion is wrong, SIA does adopt holistic risk management, but this does not mean that its holistic risk management is good enough. In its annual report, there is no justifiable information on how the manage the relationship among different risks. What make it worse is that no specific risk model is being used to explain how the relationships among risks are managed. This implies that SIA is not well knowledge in managing relationships among risks. On the other hand, we also notice that SIA has taken reactive approach in managing the impact of systematic risk and the outbreak of H1N1. Reactive actions such as cost cutting, voluntary staff unpaid leaves and other measures have been implemented. But the question is why reactive approach is taken instead of proactive approach. In fact, we all know that prevention is better than cure, why not SIA implement those measures right in time when the two risks happen rather than after such risks happen. With the imperfection in SIA's risk management, we recommend SIA to adopt a more holistic as well as proactive approach in its risk management. Here, we would like to stress that well understanding in relationships among different risk is crucial in risk management, SIA should improve in this aspect.

Bibliography

Journal

  • 2004. 'Singapore airlines' winning formula' Strategy Decision.,20(9),pp.2-7
  • Wirtz, J. and Johnston, R. 2003. 'Singapore airlines: what it takes to sustain a service excellent - a senior management perspective'. Managing service quality.,12(1),pp.10-19

Annual Report

  • Singapore Airlines. 2008/2009, 2007/2008,2006/2007,2003/2004. Singapore Airlines annual report. Viewed on November 2009. Available from: www.singaporeair.com
  • America Airlines. 2007,2008. America Airlines annual report 2007,2008. Viewed on November 2009. Available from: www.aa.com

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