It is a fallacy to believe that operating hedges automatically reduce risks and are not speculative ("Why levy fuel surcharges when oil prices are down?"; Jan 30).
Long-term hedges, such as buying material inputs at long-term fixed prices, are risky and speculative.
If material prices drop and your competitors did not hedge, they will be able to undercut you and take away your market share.
Besides current-year hedging losses, a company also has to take mark-to-market losses on non-mature hedges, which will hit the company's financial ratios.
This is happening in the airline industry.
Witness the numerous deals and promotions offered by budget airlines, and airlines from the Middle East, Europe and other parts of Asia.
Customers don't bother with the breakdown of ticket prices. They are concerned with only the final price.
As a long-term shareholder of Singapore Airlines, it pains me to see the huge amount of hedging losses suffered so far.
I find it counterintuitive for SIA to have hedged to such an extent at peak oil prices, knowing that oil prices are highly cyclical.
It would make more sense to hedge when prices are at cyclical lows.
It is not clear in SIA's accounts the extent of remaining fuel hedges (volume, price and duration) and the mark-to-market losses.
There is a loss of about $739 million recorded in SIA's statement of comprehensive income for the year ended March 31, 2015, for cash hedges. How much of this is due to fuel hedges and what is the sensitivity of the hedges to further fuel price declines?
This may be a reason for SIA's price underperformance relative to other airlines.
The management should provide more information on the fuel hedges to shareholders.
Arthur Ling Ping Sheun