419 airlines 071

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  • Hazard Include weather, terrorism, workers compensation, safety and security
  • BACKGROUND The Company (SIA) was incorporated as a wholly-owned subsidiary of the Singapore government through Temasek Hldgs (Pte) Ltd on 28 January 1972 as a public company. SIA is one of the world's most successful airlines. It has an expanding route network coverage of 100 cities in 42 countries, and it is one of the companies that the youngest and fastest growing fleets in the world.
  • This is the most updated route map of Singapore Airlines. The dots on the maps are cities that Singapore Airline has flights to. As we can see, its coverage is concentrated in Europe and Asia.
  • One is the biggest competitive advantage for Singapore airline is Fleet Age. Fleet age is the length of time that an airplane has been flying for. While the industry average of fleet age is around 150 months or more than 12 years, the fleet age of Singapore Airline is around 80 months or 6 to 7 years. This graph shows that the fleet age of Singapore Airline is only about half of industry average. It can be expected that airplanes of Singapore Airline are generally newer, better, safer and will last longer. That is a big competitive advantage for SIA because airplanes are critically important assets for the airline companies.
  • This graph here shows the 5 year profitability of Singapore Airline. Due the SARS, Singapore Airline had very low profit in the year of 03-04. But the company had large improvement in the year of 04-05. Even though the profit in the latest year has dropped a little bit, but compare to the previous years, the profit is still at a high level.
  • As I said a few minutes ago, SIA is wholly-owned subsidiary of the Singapore government through Temasek Hldgs (Pte) Ltd. And actually Singapore airline also have 4 subsidiary companies, which are Silk Air, Tradewinds Tour and Travel, SIA Engineering Company, SIA Cargo, and SATS. All 4 of them are in closely related business with Singapore Airline, for example, Trades Tour and Travel deals with travelling, SIA cargo deals with the cargo transportations, SATS deals with the baggage handling business. And they all work together to provide a full line of services to its customers. Singapore Airline, being the parent company of the 4, accounts for about 75% of the total revenue of the group.
  • Here is the Balance sheet for both the group and the company. It looks very different from the Balance sheet of Canadian companies because it is built under different accounting standards. However, we can see that the value of asset of the company is about 18.5 billion, and the aircraft, spares and spare engines account for 12.2 billion of that, which is about 67% of the total asset. From this figures again we can see that the aircrafts are fatal assets of the company. We have calculated the ROA, ROE and Earning per share of the group for the two financial years. The results are consistent with the profitability chart that all the measures has dropped a little bit from the previous year, but still look healthy.
  • Here is the Cash Flow statement of the group. The cash flow of the group has been steady for the two years and At the end, the cash and cash equivalent has increased by about 10% from the previous years.
  • Here is the consolidated income statement of the group for the two years. the staff cost only account for about 20 to 24% of the total expenditure, while the industry average is 40%. On the other hand, the percentage of fuel cost as to total cost for SIA group is higher than the industry average, Its fuel cost accounts for 26 to 35% for the two years and the industry is around which is 15%. We can see that SIA group’s exposure to jet fuel risk is a lot higher than the average competitors. From the income statement, we can see that the operating profit dropped from 1.3 billion to 1.2 billion, but the only account that has significant change is actually fuel costs, which has an increase of 60%. The exact amount of increase in jet fuel is 1547.4 million, while the decrease in operating profit is only 103.8 million. This comparison indicates that in spite of the decreased in profit, the company’s performance is actually really improving excluding the fact that fuel cost has significantly increased. In another aspect, it also tells us that risk management of fuel cost critically determines the success of the whole group.
  • Here a table that tells us the stock performance of the group during the 12 months period ending Feb. 28 th , 2007. We can see that the stock price in the last year has been moving within the range of $12 to $18, and it was closed at $15.80.
  • Here is the 5-year stock price trend of the company. we can see here that the stock price had suffered from disasters like 911 and SARS in the early years but it is gradually recovering and improving in the last 3 years. More recently, with the stock price closing at $15.80 at the end of February, it has now increased to over $17 per share.
  • Here is a table that shows us the top 10 major shareholders of Singapore Airline. Even though Singapore Airline is a public traded company. but closely held among a few companies. Temasek Holdings Limited holds over 50% of the shares of the company and have the control of company. And most of the other shares are held by big companies like HSBC, Citibank and Morgan Stanley. The top 10 shareholders altogether holds over 90% of the shares, and it tells us that very little percentage of the shares are actively traded in the market.
  • Now let’s look at the stock option that the companies issued to its employees. Since 2001, the exercise price of the stock option is remained at the range of 10 – 13 dollars, while the stock prices has increased to about 16 dollars recently. And The stock options accounts take up 79 million unissued shares, which is about 6% of the total shares outstanding. Here my presentation about the Singapore Airlines’ background and financial performance, I will let Tony to talk about the Risk that Singapore airline is facing and their risk management strategies.
  • Order by risk factors RISK FACTOR 1 Jet fuel cost structure RISK FACTOR 2 EMPLOYMENT COST employee stock options RISK FACTOR 3 INSURANCE RISK FACTOR 4 INTEREST RATE
  • 788M share outstanding
  • MOVE THIS SLIDE BEFORE JET FUEL COST Southwest's low cost structure is one of its primary competitive advantages and many factors could affect the Company's ability to control its costs. Factors affecting the Company's ability to control its costs include the price and availability of fuel, results of Employee labor contract negotiations, Employee hir- ing and retention rates, costs for health care, capacity decisions by the Company and its competitors, un scheduled required aircraft airframe or engine repairs, regulatory requirements, availability of capital markets, and future financing decisions made by the Company.
  • Faced with increasing low fare and lower cost competition, and record high energy costs, Southwest have aggressively reduced their cost structures, largely through downsized work force and renegotiated collective bargaining and vendor agreements and increasing productivity. Headcount per aircraft decreased from 74 at Dec 2004 to 71 at Dec 2005
  • Historically, the Company's relationships with its Employees have been very good. However, the results of labor contract negotiations (approximately 82% of the Company's Employees are represented for collective bargaining purposes by labor unions), Employee hiring and retention rates, and costs for health care are items with potentially significant impact on the Company's operating results.
  • stock-based compensation utilizing the intrinsic value method in accordance with the provisions of Accountyears ing Principles Board Opinion No. 25 (APB 25), Accordingly, no compensation expense is recognized for fixed option plans because the exercise Prices of Employee stock options equal or exceed the market prices of the underlying stock on the dates of grant. Compensation expense for other stock options is not material.
  • The Black-Scholes option valuation model was developed for use in estimating the fair value of short- term traded options that have no vesting restrictions and are fully transferable. (For 2005, the Company relied on observations of both historical volatility trends as well as implied future volatility observations as determined by independent third parties.)
  • Given that company current stock price is $15
  • Average 4.1 years Range from 1-6.1 years
  • Largest portion is Aircraft purchase commitments, following by long term debt
  • The fair value of the interest rate swap agreements, excluding accrued interest, at Decem- ber 31, 2005, was a liability of approximately $31 mil- lion. The comparable fair value of these same agreements at December 31, 2004, was a liability of $16 million. The long-term portion of these amounts are recorded in ""Other deferred liabilities'' in the Consolidated Balance Sheet for each respective year and the current portion is reflected in ""Accrued liabilities.'' In accordance with fair value hedging, the offsetting entry is an adjustment to decrease the carrying value of long-term debt. See Note 10 to the Consolidated Finan- cial Statements.
  • The Company also has some risk associated with changing interest rates due to the short-term nature of its invested cash, which totaled $2.3 billion, and short Term investments, which totaled $251 million, at December 31, 2005. “ a hypothetical ten percent change in those rates would correspondingly change the Company's net earnings and cash flows less than $2 million ” Considering the Company's short-term investments, and float ing-rate debt outstanding, an increase in rates would have a net positive effect on the Company's earnings and cash flows, while a decrease in rates would have a net negative effect. FV of interest rate swap as of Dec 31, 05 is: was a liability of approximately $31 million
  • Outstanding financial derivative instruments ex- pose the Company to credit loss in the event of nonper formance by the counterparties to the agreements. However, the Company does not expect any of the counterparties to fail to meet their obligations. The credit exposure related to these financial instruments is represented by the fair value of contracts with a positive fair value at the reporting date. To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its expo- sure to a single counterparty, and monitors the market position of the program and its relative market position with each counterparty. At December 31, 2005, the Company had agreements with seven counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount or credit ratings fall below certain levels. At December 31, 2005, the Company held $950 million in fuel hedge related cash collateral deposits under these bilateral collateral provisions. These collateral deposits serve to decrease, but not totally eliminate, the credit risk associated with the Company's hedging program. The cash deposits, which can have a significant impact on the Company's cash balance and cash flows as of and
  • Following the terrorist attacks, commercial aviation insurers significantly increased the premiums and reduced the amount of war-risk coverage available commercial carriers. The federal Homeland Security Act of 2002 requires the federal government to provide third party, passenger, and hull war-risk insurance coverage to commercial carriers through a period of time that has now been extended to December 31, 2006. The Company is unable to predict whether the government will extend this insurance coverage past December 31, 2006, whether alternative commercial insurance with comparable coverage will become available at reasonable premiums, and what impact this will have on the Company's ongoing operations or future financial performance.
  • 419 airlines 071

    1. 1. AIRLINE INDUSTRY Stan Li, Jessica Liu, Ben Mui, Edison Pei, Tony Yeung
    2. 2. Airlines • Provide air transport services for passengers or freight’ • Categories of airline services include: • International • National • Regional • Domestic
    3. 3. Major Issues • Weather • Fuel Cost -14-16% of an airline's total costs • Labor - 40% of an airline's expenses • Other • Airport capacity, route structures, technology, and costs to lease or buy the physical aircraft
    4. 4. Pressures from External Forces • Threat of new entrants • Power of suppliers • Power of buyers • Availability of substitutes • Competitive rivalry
    5. 5. Key Success Factor • Attracting customers • Managing its fleet • Managing its people • Managing its finances
    6. 6. Industry Profit Pattern • Cyclical industry • Four or five years of poor performance precede five or six years of improved performance. • Mature industry  consolidation trend
    7. 7. Government Regulations • Government has extensive regulation for economic, political, and safety concerns • Some countries (e.g. US and Australia) have "deregulated" their airlines. • The entry barriers for new airlines are lower in a deregulated market, • far greater competition • average fares tend to drop 20% or more.
    8. 8. International Regulation • Groups (e.g. International Civil Aviation Organization) establish worldwide standards for safety and other vital concerns. • Most international air traffic is regulated by bilateral agreements between countries. • Bilateral agreements are based on the "freedoms of the air“ • In the 1990s, "open skies" agreements became more common
    9. 9. Major Risks Faced by Airlines • Strategic risk • Business design choices • Financial risk • Variability of revenue and costs • Operational risk • Tactical aspects of running the business • Hazard risk • Safety of physical assets
    10. 10. Risk Events Causing Stock Drops 1991-2001 Source: Mercer analysis
    11. 11. Singapore Airline
    12. 12. Background • Public company since 1972 in Singapore Stock Exchange • Wholly-owned subsidiary of the Singapore government through Temasek Hldgs (Pte) • Its expanding route network covers 110 cities in 42 countries now. • Having the fastest and youngest growing fleets.
    13. 13. Coverage
    14. 14. Competitive Advantage - Fleet Age Comparison
    15. 15. Decreased but Strong Profitability
    16. 16. Singapore Airline Company Structure • Subsidiaries: SilkAir, Tradewinds Tour and Travel, SIA Engineering Company, SIA Cargo, and SATS • All the companies are in closely related business • SIA accounts for about 75% of the total revenue
    17. 17. The Group 2005-06 2004-05 ROA 6.55% 7.38% ROE 9.29% 10.42% EPS (cents) 101.7 111
    18. 18. Consolidated Income Statement
    19. 19. Stock Information
    20. 20. 5-year Stock Price Trend
    21. 21. List of Major Shareholders
    22. 22. Employee Stock Option (cont) At the end of the financial year, options to take up 79,196,566 unissued shares in the Company were outstanding, which is 6% of the total share outstanding.
    23. 23. Financial Risk • Market Risk • Jet fuel price risk • Foreign currency risk • Interest rate risk • Market price risk • Counterparty risk • Liquidity risk • Other possible risk
    24. 24. Jet Fuel Price Risk
    25. 25. Jet Fuel Price Risk (cont) • A change in price of US$0.01 per American gallon of jet fuel affects the Group’s annual fuel costs by US$14.7 million Jet fuel price risk management • Swaps and options contracts hedged up to 24 months forward • The group has a 55% jet fuel hedge ratio at $81 per barrel.
    26. 26. Jet Fuel Price Risk (cont.) • FY2006 operating profit = $1.213B • FY2005 operating profit = $1.317B • Dropped $105 million (-7.9%) • Mainly due to rise in higher jet fuel price • From this, one can see the profitability of the group lies mainly on the hedge strategy
    27. 27. Jet Fuel Price Risk (cont) • Hedge by Mean of Platts Singapore (MOPS) • As of March 31st 2006, the MOPS price USD $79.54 • Annualized volatility 2005-06 = 26.36% • Risk free rate = 2.4%
    28. 28. Jet Fuel Price Risk (cont) • On 26 April 2006, the Company announced an increase of the fuel surcharge on tickets sold from 15 May 2006 • The adjustments will offer partial relief of higher operating costs arising from persistently high price of jet fuel hovering at US$90 per barrel, as compared to US$80 per barrel when the surcharge was last revised in September 2005.
    29. 29. • Net fair value gain of $82.2m Jet Fuel Price Risk (cont)
    30. 30. Foreign Currency Risk • Foreign currency accounts for 65% of total revenue (2004-05: 68%) and 69% of total operating expenses (2004-05: 64%) • The Group’s largest exposures are from USD, Euro, UK Sterling Pound, Swiss Franc, Australian Dollar, New Zealand Dollar, Japanese Yen, Indian Rupee, Hong Kong Dollar, Chinese Yuan, Korean Won and Malaysian Ringgit. • The Group generates a surplus in all of these currencies, with the exception of USD. • The deficit in USD is attributable to capital expenditure, fuel costs and aircraft leasing costs – all conventionally denominated and payable in USD.
    31. 31. Foreign Currency Risk Management • The Group manages its foreign exchange exposure by a policy of matching, as far as possible, receipts and payments in each individual currency. • The Group also uses forward foreign currency contracts to hedge a portion of its future foreign exchange exposure. • Such contracts provide for the group to sell currencies at predetermined forward rates, with settlement dates that range from one month up to one year. • The Group uses forward contracts purely as a hedging tool.
    32. 32. Interest Rate Risk • Interest rate risk • Changes in interest rates impact interest income and expense from short-term deposits and other interest-bearing financial assets and liabilities
    33. 33. Interest Rate Risk (cont) • Long-Term liabilities • The company’s finance lease commitments are charged at a margin above the LIBOR. These ranged from 3.19% to 5.18% (2004-05: 1.56% to 2.31%) per annum. • SIA Cargo’s finance lease commitments are charged at a margin above the LIBOR. These ranged from 2.88% to 4.74% (2004-05: 1.15% to 2.65%) per annum.
    34. 34. Interest Rate Risk (cont) • Long-Term Assets • Non-equity investments of $382.4 million (2005: $389.8 million) for the Group and the Company relate to interest-bearing investments with an effective annual interest rate of 3.97% (2004-05: 1.71%). • During the financial year, the Group and the Company recorded an impairment loss in the profit and loss account of$1.0 million (2004-05: $0.1 million) pertaining to unquoted equity investments. • The Group’s loan receivable within one year of $42.0 million is unsecured and bears interest between 3.19% to 5.05% (2004-05: 1.56% to 3.19%) per annum.
    35. 35. Interest Rate Risk (cont) • As at 31 March 2006, the composition of cash and bank balances held in foreign currencies by the Group is as follows: USD – 21.8% (2005: 21.7%), EUR – 13.6% (2005: 21.1%) and JPY – 13.2% (2005: 13.3%). • Cash at bank earns interest at floating rates based on daily bank deposit rates ranging from 1.38% to 4.71% (2004-05: 0.28% to 2.20%) per annum. • Short-term deposits are made for varying periods of between one day and three months depending on the immediate cash requirements of the Group, • earn interests at the short-term deposit rates. The weighted average effective interest rate of short-term deposits is 3.6%
    36. 36. Market Price Risk • Potential loss resulting from a decrease in market prices • Such as lower airfares • The Group owned $412.2 million (2005: $41.6 million) in quoted equity and non-equity investments at 31 March 2006.
    37. 37. Counterparty Risk • Surplus funds are invested in interest- bearing bank deposits and other high quality short-term liquid investments. • Counterparty risks are managed by limiting aggregated exposure on all outstanding financial instruments to any counterparty, taking into account its credit rating. Such counterparty exposures are regularly reviewed, and adjusted necessary. • This mitigates the risk of material loss arising in the event of non-performance by counterparties.
    38. 38. Liquidity Risk • At 31 March 2006, the Group had cash and short- term deposits amounting to $3,151.6 million (2005: $2,840.2 million). In addition, the Group had available short-term credit facilities of about $1,449.1 million (2005: $1,417.1 million). • The Group also has Medium Term Note Programmes under which it may issue notes up to $1,500 million (2005: $1,500 million). • Under these Programmes, notes issued by the Company may have maturities as may be agreed with the relevant financial institutions, and notes issued by one of its subsidiary companies may have maturities between one month and ten years.
    39. 39. Liquidity Risk Management • The Group’s holdings of cash and short-term deposits are expected to be sufficient to cover the cost of all firm aircraft deliveries due in the next financial year. • any shortfall would be met by bank borrowings or public market funding. • Due to the necessity to plan aircraft orders well in advance of delivery • it is not economical for the Group to have committed funding in place at present for all outstanding orders. • The Group’s policies in this regard are in line with the funding policies of other major airlines.
    40. 40. Other Possible Risks • Risk management committee’s of the different subsidiaries and associated companies create the ability to react to unforeseen events such as • 9-11 • SARS • Iraq war • Bali bombing
    41. 41. Risk Management Governance SIA Board of Directors Board Audit and Risk Committee SIA Group Risk Management Committee SIA SIAEC SATS Group SilkAir SIA Cargo Other Subsidiary RMC RMC RMC RMC RMC RMC
    42. 42. Statement on Risk Management • 1) Enhancement to Risk Framework • Intro of strategic risks framework • Identify and report strategic risks and other long-term issues for senior management attention. • Review of Risks to Singapore Airlines Reputation • Review of Regulatory Compliance
    43. 43. • 2) Simulations and Tests of Risk Control • Conducted throughout the year to test the effectiveness of risk controls and handling of business continuity • The exercise tested recall responses, communications systems, functional preparedness and management decision- making under simulated “crisis scenarios”. Statement on Risk Management
    44. 44. • 3) Other Risk Process and Program • Annual Risk Management Review • Whistle Blowing Program • All “wrong-doings” can be reported and investigate to an independent investigation unit • “Wrong-doings” can include fraud, theft, abuse of authority, breach of regulations or non-compliance with corporate policy such as improper banking or financial transactions. • Banking Transaction Procedures • Lenders to Singapore Airlines must be properly authorized • All group companies/divisions has its own approved limits and procedures that must be followed Statement on Risk Management
    45. 45. • Board of directors after reviewing the risk management practices and activities of Singapore Airlines has not found anything to suggest that risks are not being satisfactory managed. Statement on Risk Management
    46. 46. Southwest Airline
    47. 47. Company profile • Southwest Airlines was founded in 1967 and is headquartered in Dallas, Texas. • Southwest Airlines Co. provides scheduled air transportation services in the United States. • As of December 31, 2006, the company operated 481 Boeing 737 aircrafts and provided service to 63 cities in 32 states. • It also sells credit to business partners, including credit card companies, hotels, telecommunication companies, and car rental agencies.
    48. 48. Executives • Chairman – HERBERT D. KELLEHER • CEO – GARY C. KELLY • President and director – COLLEEN C. BARRETT • CFO – LAURA WRIGHT
    49. 49. Routes Map
    50. 50. Competitors • AMR corporation • Continental Airline, Inc. • JetBlue Airways Corporation
    51. 51. South West Airline Market Share Market Share 63% 47% South West Other Carriers
    52. 52. Competitive Strength Low Cost Leadership • Productivity is the key • High asset utilization • Point-to-point system • More direct nonstop routings • Employee Proficiency • 71 employees per aircraft • Lowest ratio since 1972
    53. 53. Stock Performance
    54. 54. Stock Performance • Last Trade:15.00 • Change: 0.02 (0.13%) • Prev Close:14.98 Open:14.96 • Day's Range:14.96 - 15.1052wk • Range:14.56 - 18.20 • Volume:6,448,400 • Avg Vol (3m):7,768,670 • Market Cap:11.83B • P/E (ttm):24.75 • EPS (ttm):0.61Div & Yield:0.02 (0.10%)
    55. 55. Income Statements
    56. 56. Cash Flow Statements
    57. 57. Cash Flow Statements
    58. 58. Risk Factor • From company’s Annual Report: • Southwest's business is labor-intensive • Southwest relies on technology to operate its business and any failure of these system could harm the Company’s business • Insurance cost increases or reductions in insurance coverage may adversely impact the Company’s operation and financial results. • Disruptions to operations due to factors beyond Southwest’s control could adversely affect the Company. • Southwest’s low cost structure is one of its primary competitive advantages and many factors could affect the Company’s ability to control its costs.
    59. 59. Risk Factor • Jet Fuel • Unpredictable price movement • Unable to increase fares when fuel price rise • Changes in hedging strategy and the effectiveness of hedging arrangement have significant impact on operating results
    60. 60. Risk Factor: Jet Fuel • Anticipating higher jet fuel prices • Not as strong hedge position and higher market price in 2006 • Lower hedge ratio and prices of hedges in place are higher
    61. 61. Purpose of Hedging • Airline operators are inherently dependent upon jet fuel to operate, and therefore, impacted by change in jet fuel prices • Jet fuel and oil consumed in 2005, 2004, and 2003 represented approximately 19.8%, 16.7%, and 15.2% of operating expenses respectively • The company endeavours to acquire jet fuel at the lowest possible cost
    62. 62. Hedging Strategy - Jet Fuel • Hedging Commodities: • Primarily crude oil • Heating oil • Unleaded gas • Components of hedging positions: • Call options • Collar structures • Fixed price swap agreements
    63. 63. Hedging Strategy: Jet Fuel • Hedge ratio: • 70% for 2006 at $36/barrel • 60% for 2007 at $39/barrel • 35% for 2008 at $38/barrel • 30% for 2009 at $39/barrel • Near term hedge positions are in the form of option contracts • Limit the cost of rising fuel price and benefit the company of declining fuel price
    64. 64. Value of Hedge Contracts • As of December 31, 2005, the company has $1.1 billion derivative instruments • $640 million of that was classified as “Fuel hedge contracts” • Fair value was determined by the use of present value methods or standard option value model with assumptions about the commodity prices based on those observed in underlying markets
    65. 65. Balance Sheet - Assets
    66. 66. Performance of Hedging • Gains from hedging: • $890 million unrealized gain, as of December 31, 2005 • Of that amount, $327 million are expected to be realized in 2006
    67. 67. Balance Sheet – Liability & SW’s Equity
    68. 68. Cost Structure Fuel and oi l 20% Mai nt enance 6% Ai r cr af t r ent al s 2% Landi ng f ees 7% Depr eci at i on and amr t 7% Ot her 18% Sal ar i es 40% Operating Cost per Available Seat Mile (ASM)
    69. 69. Cost Control • To absorb the increasing in Jet Fuel cost, Southwest maintain its low cost characteristic through reduction in other operating expenses. • Reduction in non-fuel unit costs of 1.5% • Downsized work force and renegotiated collective bargaining and vendor agreements • Headcount per aircraft decreased from 74 at Dec 2004 to 71 at Dec 2005
    70. 70. Risk Factor 2 – Employment cost
    71. 71. Employee Stock Option • Options granted at or above the FMV of the common stock • 6-12 years terms • Neither Executive officers nor members of the company’s board of directors are eligible to participate • Options granted at the money • 10 years terms • Fully exercisable over 3, 5, or 10 years of continued employment ESO subject to bargaining agreements Other Employee plans
    72. 72. • The Company accounts for stock-based compensation utilizing the intrinsic value method in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB 25) • No compensation expense is recognized for fixed option plans because the exercise prices of Employee stock options equal or exceed the market prices of the underlying stock on the dates of grant. Compensation expense for other stock options is not material. • Under the new accounting regulation SFAS 123R : Expected 2006 salary increase is approximately $20 million Employee Stock Option
    73. 73. Employee Stock Option
    74. 74. Employee Stock Option
    75. 75. Employee Stock Option An option’s exercise price may be paid (i) in cash, (ii) in shares of Common Stock, (iii) through a cashless exercise, or (iv) in any other manner permitted by the committee.
    76. 76. Executive Stock Option • Option Exercises in Last Fiscal Year The following table provides information regarding stock options exercised, and the value realized upon exercise, by the named executive officers during 2006.
    77. 77. Interest Rate risk Ot her Pur chase Ai r cr af t Pur chase l ong t er m debt Capi t al Lease I nt er est Commi t men t s Oper at i ng Lease
    78. 78. Interest Rate Hedging • Interest rate swap • Take advantage of short term rate significantly lower than fixed long term rate • Objective is to reduce the volatility of net interest income by better matching the reprising of assets and liabilities • “A hypothetical ten percent change in market interest rates as of December 31, 2005, would not have a material effect on the fair value of the Company's fixed rate debt instruments.”
    79. 79. Interest Rate Swap Security Pay Floating rate Receive Fixed rate $385 million 6.5% senior unsecured notes due 2012 (LIBOR) plus a margin every six months Estimated to be 6.46% 6.5% $375 million 5.496% Class A-2 due 2006 (LIBOR) plus a margin every six months Estimated to be 6.73% 5.496 % $350 million 5.25% senior unsecured notes due 2014. (LIBOR) plus a margin every six months average floating rate In 2005 is 3.82% 5.25%
    80. 80. Interest Rate Hedging • Investments • The Company also has some risk associated with changing interest rates due to the short-term nature of its invested cash • ST invested cash $2.3 billion • ST investment $251 million • “a hypothetical ten percent change in those rates would correspondingly change the Company's net earnings and cash flows less than $2 million” The returns earned parallel closely with short-term floating interest rates • Net effect on interest rate • Increase in interest rate: net +tv effect on earnings and CF • Decrease in interest rate: net –tv effect on earnings and CF • FV of interest rate swap as of Dec 31, 05 is: • was a liability of approximately $31 million
    81. 81. Credit risk • The Company does not expect any of the counterparties to fail to meet their obligations • To manage credit risk: • selects and periodically reviews counterparties based on credit ratings • limits its exposure to a single counterparty • and monitors the market position of the program and its relative market position with each counterparty • The Company had agreements with seven counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount or credit ratings fall below certain levels. • held $950 million in fuel hedge related cash collateral deposits under these bilateral collateral provisions • decrease, but not totally eliminate, the credit risk associated with the Company's hedging program
    82. 82. Insurance • Purpose of Insurance: • protect the Company and its property • comply both with federal regulations and the Company’s credit and lease agreements. • General Coverage: • public and passenger liability, property damage, cargo and baggage liability, loss or damage to aircraft, engines, and spare parts, and workers’ compensation. • Increasing insurance cost after 9-11
    83. 83. Conclusion It is important to hedge and hedge appropriately
    84. 84. THE END Any questions or comments are welcomed!

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