Table of Contents

Introduction.............................................................................................................................................................2
1.0 Evaluation of commercial loan request.............................................................................................................3
1.1Market and business operation review...........................................................................................................3
1.1.1 Industry review.......................................................................................................................................3
1.2 Risk Factors...................................................................................................................................................4
1.2.1 Geo-political Event................................................................................................................................4
1.2.2 Natural Disasters and Epidemics...........................................................................................................4
1.2.3 Economic backlash due to financial downturns....................................................................................5
2.0 Balance sheet analysis.......................................................................................................................................6
3.0 Profit and loss analysis......................................................................................................................................6
4.0 Financial ratios analysis....................................................................................................................................7
4.1 Liquidity ratios..............................................................................................................................................7
4.2 Profitability ratios..........................................................................................................................................8
4.3 Gearing ratios................................................................................................................................................9
5.0 Credit Analysis................................................................................................................................................10
5.1 Character.....................................................................................................................................................10
5.2 Capital..........................................................................................................................................................10
5.3 Capacity.......................................................................................................................................................11
5.4 Conditions....................................................................................................................................................11
5.5 Collateral.....................................................................................................................................................11
6.0 Recommendation and Conclusion..................................................................................................................12
References.............................................................................................................................................................13
Introduction
The objective of the following report is to conduct a critical study on a loan application of
$300million Singapore dollars lodged by Singapore Airlines. In order accept or reject this
application it is important to conduct a thorough investigation into the companies credit
worthiness in order to process the application. Due to the substantial amount that has been
requested it is vital to be able to break down the corporation in order to study its credibility.
The evaluation of the company will be done by using financial analysis in order to check the
health of the company, by reviewing its Liquidity, Gearing and Profitability position. Once this
has been conducted it has to be taken into account that the company is exposed to many
elements that have an affect on its general environment, therefore to better understand the
nature of the company the macro economy around it will be studied. After these analysis are
conducted to the highest level of scrutiny the decision to accept/reject the proposal will be
undertaken followed by any recommendations the management wants to bring up to its head
of department.
1.0 Evaluation of commercial loan request

1.1Market and business operation review

In order to consider the loan application lodged by Singapore Airlines the industry the company
operates in and the macro environments it is exposed to will be analyzed. The purpose behind
this is to have a clear understanding of the market the company operates in and to conduct a
review of its business operation.

1.1.1 Industry review

The aviation industry has been going through a tough economical landscape during the recent
years. This could mainly be credited to the recession which saw oil price sky rocket to record
heights due to the recession which occurred in the US (during the period 2008-2010) which had
a severe backlash to many Asian markets. That being said many financial analysts’ predict that
the Aviation industry will pick up due to the rapid development and growth of many key Asian
markets like China and South Korea. (Webmaster [a], 2008)
That being said it is very hard to share their optimism after the recent calamity in the island
Country of Japan which saw its whole Northern Peninsula capitulate to a tsunami of apocalyptic
proportions. This is because the financial affect this occasion will have on the South East Asian
Market has to unfold yet.
It should also be taken into consideration that SIA was affected the most because they specialize
in premium travel and the situation they are currently faced with in the market is not very
promising due to the rise of budget airlines. Travel around the South East Asian region as a
result of the economic hardships has seen a drop of 9% in traffic around the Asia Pacific region.
(Gittens, 2009)
The recovery process of SIA in the industry is very slow and although it seems steady, the
situation remains very fragile. (Seng, 2010) They projected profits for the during the year end of
2010 but this progress would probably not follow into the Financial year of 2011 due to the
political turbulence the Middle East is currently shrouded by. Due to this instability oil prices
have increased as demand curve over takes the supply.
The aviation industry was predicted to grow by 7% and talks of new services were proposed to
be introduced into the market due to the steady growth of the industry after the latest round of
the financial crises. (Herdman, 2010) That said it has to be said that these prediction
unfortunately cannot be relied on since they macro environment which lead to the predictions
have drastically changed in lights of recent developments around the globe.

1.2 Risk Factors

The aviation industry is very sensitive to many factors that could arise in the macro
environment. Due to this reason the factors which have the greatest impact on the SIA Group
will be discussed. Some of the main factors are:
 Geo-political Event
 Natural disasters and epidemics
 Economic backlash due to financial downturns

1.2.1 Geo-political Event

SIA group specializes in transporting passenger around the world. This view can be adopted
when the operations of SIA is broken down to simple Laymen terms. Therefore political
instability or a situation where a country’s sovereignty comes under threat would severely affect
the demand for travel in the affected regions. Also due to the rise of terrorism and the raising
level of paranoia in many countries a significant reduction in air travel can be observed.

1.2.2 Natural Disasters and Epidemics

Natural disasters and epidemics can have a crippling affect on SIA if they were to occur. One of
the best current examples for this situation can be observed by the natural disaster Japan
recently experienced. Many routes that SIA have between its take of points and Japan have
ceased due to flights not being filled with enough passengers. (Seng, 2010)

In the case of epidemics the situation could be dire since travel into region drastically falls. The
best examples for these scenarios are the H1N1 virus and the bird flu. Due to the contagious
nature of these viruses many travelers were afraid to tour or visit the region in fear of being
exposed to the epidemic as a result many countries tourism dropped and since SIA have routes
to many of these countries they struggled a lot because they were unable to attract customers.
1.2.3 Economic backlash due to financial downturns
It is safe to assume that the growth of an economy is directly proportional due to the growth of
the aviation industry. This is because when the economy grows people have more money and
spending increases. Therefore many people spend money t go on holidays and tours around the
globe to partake in the diverse cultures that can be found in every corner of the globe. In case
the economy goes through a downturn the money people have readily to spend also decreases
due to individuals not being able to spend money on improving the quality of their life styles.
The recession which hit the United States of America can be taken for example. The affects of
the downturn was not an isolated incident its affects rippled to every corner around the globe
and affected a lot of individuals around the globe.

It is also important to note that SIA have also been adversely affected due to economic
downturns, for e.g. the rising rate of inflation and oil prices forced them to ground many of their
planes. (Lecturer Sam Suichaa) This was due to the rising cost of operations and SIA being a
luxury airliner didn’t have people who were able to afford their services.

Note: There are many other factors that affect the airline industry like credit, foreign currency
risk, and the competitive nature of the industry but due to certain limitations only the key
factors were discussed in greater details.
2.0 Balance sheet analysis
The balance sheet of Singapore airlines has been analyzed from the year 2007 to 2010. It is seen
that there has been no significant changes in major components of the balance sheet.
Their cash reserves have dropped around 20% from the period of 2007-2010. Their cash
reserves which dropped in the year 2009 managed to recover marginally by the year end of
2010. There has been no considerable change in their fixes assets. It has been more or less
constant in the last four years. Which signifies their investment in assets like aircrafts, spares,
land and building has been constant. Their capital and reserves have dropped by 6-8% in the
past two years. Their long term liabilities have also been decreasing slightly over the years. This
shows that they have been borrowing less in the recent years.
All in all there have been no big changes in their assets and liabilities. There has been no
exponential growth or decline in the items of balance sheet from the period analyzed.

3.0 Profit and loss analysis

Their revenue has decreased by around 20% in 2010 as compared to 2009 and 2008. Their
operating profit has gone down by 93%. This has resulted in a dramatic change in their net
profit after tax amount. The increase in operating expense over the years has also been one of
the reasons for this fall in profit. Their other profits amount has also seen a fall of more than
50% in 2008 compared to 2007, which has further gone down in 2009 and 2010.
This shows that their profitability has not been up to the mark as compared to other big players
in the industry.
4.0 Financial ratios analysis
The financial ratios analysis has helped us to determine the strengths and weaknesses of
Singapore airlines. It has helped in gauging the financial health of the company.

4.1 Liquidity ratios

Ratios Formula 2010 2009 2008 2007
1.Current ratio current assets 0.90 0.78 0.90 0.95
current liabilities
2.Quick asset ratio current assets−stock 0.83 0.71 0.84 0.89
current liabilities
3.Stock turnover COGS 14.80 17.80 15.61 14.31
average stock ∈trade
ratio
4.Debtors collection average debtors 38.71 33.90 46.70 49.17
×12
credit sales
period

5.Creditors average creditors 2.54 2.50 2.35 2.50

×12
credit purchases
payment period

Current ratio indicates the adequacy of current assets to meet its short term debt. Their current
ratio has always been under 1, which shows their inadequacy in clearing short term debt. Their
current liability has been more than their current assets which is not a good sign for the
company.
Quick asset ratio shows the ability of the company to repay its immediate obligations using cash
or similar quick assets. Their ability to meet the short term debt has been decent through the
period. It shows that not a lot of current assets are tied up and at the same time efficient use of
the liquid asset is being made. If the quick ratio is between 1 – 0.7 it is considered to be ideal,
which they have been able to attain.
Due to nature and the business of the company ratios like stock turnover, Debtors collection
period and Creditors payment period are quite high. Being in the service industry, this is not
surprising. Having said this, they are not at the top of their efficiency either. There is still room
for improvement.
4.2 Profitability ratios
Ratios Formula 2010 2009 2008 2007
Gross profit margin gross profit 0.50 0.44 0.50 0.47
revenue
Net profit margin net profit 0.022 0.072 0.13 0.15
revenue
Return on capital ating profit 0.004 0.056 0.123 0.076
employed capital employed
Operating profit operating profit 0.004 0.56 0.133 0.091
net sales
margin

Gross profit margin indicates how much of the sales volume was used to pay for the cost of
goods sold. This has been consistence through the period of four years. However this does not
indicate the profit margin which is seen to be getting lower in last two years. Their profitability
has been considerably decreasing which is an alarming sign. Other profitability ratios have also
declined. This is a result of an acute dip in revenue in 2010 and 2009. In the previous years their
profits were healthy and quite at par with their rivals. In the year 2010 their net profit before
tax was negative. Only because of non-operating income their net profit after tax was positive.
This shows their inefficiency in the recent years.
4.3 Gearing ratios
Gearing ratios are used to measure the impact of using debt capital to finance assets. It is also
known as leverage. It measure the proportion of capital employed raised by loan and long term
borrowings with equity capital. The most relevant ratio to measure the leverage of the company
was found to be gearing ratio which can be derived by dividing debt over equity capital.

Ratio Formula 2010 2009 2008 2007

Gearing ratio debt 0.39 0.42 0.41 0.40
equity capital

Singapore airlines are a low geared company since their gearing ratio has been less than 50%,
which is considered to be the benchmark. This means they use less debt capital to finance their
assets. They are majorly dependant on equity capital. Due to which their share prices have also
been less volatile.
5.0 Credit Analysis
The credit analysis for SIA is going to be done by taking applying the principle of Five C’s; they
are:

 Character
 Capital
 Capacity
 Conditions
 Collateral

5.1 Character
SIA enjoys a considerable reputation as one of the biggest players in the Aviation industry and
were even listed as the number 1 top desired brand in Singapore. The character of the group is
epitomized by the groups attempt to be perceived as the most modern, ambitious, confident
and organized company in the South East Asian aviation industry. The group has a strong sense
of pride due to their prestigious brand name, high quality and unmatched services in the Asia
pacific region of the industry. (Staff reporter, 2011)

5.2 Capital
When taking into consideration SIA’s balance sheet in order to find out how much reserves the
company has in terms of capital some pretty disturbing trends were noticed. Their resources
have depleted by 20% during the period of three years from 2007-2010. That being said when
studying their balance sheet for the year 2009 a small improvement was seen in their reserves
but it isn’t every impressive since the increase was very marginal.
Another reason it seems that SIA doesn’t have very good capital is due to the fact that they
haven’t acquired any new assets to show in their portfolio. This could be due to them reducing
their liability or due to poor management of cash.
5.3 Capacity
SIA ability to pay the loan is questionable. This is because when comparing their income for the
last three years which has dropped they were never a company with a high level of gearing.
Therefore one cannot concretely say what the capacity of the group is because if this loan is
accepted it would be the first time that the company would experience a scenario where they
have high gearing.
This is actually a worry because of the current developments in a downturn can be predicted in
the aviation industry due to raising oil prices and rising level of inflation in South East Asia, as a
result the operational expenses of the group is bound to increase and they would have to raise
the rates for their services which would see a drop in their customers. Therefore on a cautious
note it is declared that the capacity of SIA to pay back the loan is questionable at best.

5.4 Conditions
Due to the substantial amount of money SIA has requested to lend, it is only practical that the
duration for the re-payment be 8 years with regular payments every month. This way the bank
stands to earn a substantial amount of money via interest. The interest could be around 1.6%.

5.5 Collateral
For collateral the bank could request SIA to hand over their property titles as collateral. This is
because the amount requested to borrow in quite substantial and since most of their properties
are in the form of airplanes and spare parts, it is a matter of common sense that they cannot be
asked as collateral since they are the company’s main source of income. Therefore it is prudent
to request collateral in the form of lands and buildings owned by the group in a show of good
faith.

The amount of assets the group holds in terms of Buildings, Land and other assets is quite
substantial since it comes to a grand total of SGD2.1 million dollars that being said it is still
substantially lower than the amount of money requested by SIA.
6.0 Recommendation and Conclusion

Due to the current geo political landscape of the globe and raising oil prices and inflation rate, it
is only practical to come to a conclusion that these scenarios will have a resounding affect on
the Aviation industry in the upcoming years. The industry is coming out of two major crises
which were in the form of the US recession and the Asian Financial Crises and hasn’t fully
recovered from their affects.

SIA is still recuperating from a downturn and the development of the current geo political
instability in the Middle East is seeing a rise in oil prices. As a result the operational expense of
the group is bound to rise. Also due to the rising rate of inflation many individuals are getting
attracted by the new rising star in the aviation industry. This new star is the budget airlines.

Therefore it is only prudent to reject SIA loan proposal. This is because their capital reserves
have diminished substantially by 20% percent over the last 3 years and with no increase in their
capital and increasing popularity of the concept of budget airline, unless their management
comes up with a more in-depth report to show how they would tackle these arising problems
the decision to reject the loan application will not be reversed.
References

1. Andrew Herdman. (2010). Asia Pacific airlines project further growth in January but oil
prices add uncertainty. Available:
http://www.centreforaviation.com/news/2011/02/25/asia-pacific-airlines-projecting-
further-growth-in-jan-but-oil-prices-add-uncertainty-to-outlook. Last accessed 11th
March 2010.
2. Angela Gittens. (2009). Global airports see signs of stabilisation in air traffic in Aug-2009,
but long road to recovery. Available:
http://www.centreforaviation.com/news/2009/09/03/global-airports-see-signs-of-
stabilisation-in-air-traffic-in-aug-2009-but-long-road-to-recovery/page1. Last accessed
11th March 2010.
3. Chew Choon Seng. (2010). Singapore Airlines positive yet cautious about outlook; yields
to remain steady; capacity growth. Available:
http://www.centreforaviation.com/news/2010/11/10/singapore-airlines-positive-yet-
cautious-about-outlook-yields-to-remain-steady-capacity-growth/page1. Last accessed
27th March 2010.
4. Staff Reporter. (2011). Sgapore Airlines beats out Shangri-La as Singapore's most
desired brand. Available: http://sbr.com.sg/media-marketing/in-focus/singapore-
airlines-beats-out-shangri-la-singapores-most-desired-brand. Last accessed 27th
March 2010.
5. Webmaster [a]. (2008). Asian Premium Travel downturn Intensifies. Available:
http://www.centreforaviation.com. Last accessed 23rd March 2010.