Presentation on theme: "Stan Li, Jessica Liu, Ben Mui, Edison Pei, Tony Yeung"— Presentation transcript:
1 Stan Li, Jessica Liu, Ben Mui, Edison Pei, Tony Yeung AIRLINE INDUSTRYStan Li, Jessica Liu,Ben Mui, Edison Pei, Tony Yeung
2 Airlines Provide air transport services for passengers or freight’ Categories of airline services include:InternationalNationalRegionalDomestic
3 Major Issues Weather Fuel Cost -14-16% of an airline's total costs Labor - 40% of an airline's expensesOtherAirport capacity, route structures, technology, and costs to lease or buy the physical aircraft
4 Pressures from External Forces Threat of new entrantsPower of suppliersPower of buyersAvailability of substitutesCompetitive rivalry
5 Key Success Factor Attracting customers Managing its fleet Managing its peopleManaging its finances
6 Industry Profit Pattern Cyclical industryFour or five years of poor performance precede five or six years of improved performance.Mature industry consolidation trend
7 Government Regulations Government has extensive regulation for economic, political, and safety concernsSome countries (e.g. US and Australia) have "deregulated" their airlines.The entry barriers for new airlines are lower in a deregulated market,far greater competitionaverage fares tend to drop 20% or more.
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 Major Risks Faced by Airlines Strategic riskBusiness design choicesFinancial riskVariability of revenue and costsOperational riskTactical aspects of running the businessHazard riskSafety of physical assets
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.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.
13 CoverageThis 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.
14 Competitive Advantage - Fleet Age Comparison 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.
15 Decreased but Strong Profitability This graph here shows the 5 year profitability of Singapore Airline. Due the SARS, Singapore Airline had very low profit in the year of But the company had large improvement in the year of 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.
16 Singapore Airline Company Structure Subsidiaries: SilkAir, Tradewinds Tour and Travel, SIA Engineering Company, SIA Cargo, and SATSAll the companies are in closely related businessSIA accounts for about 75% of the total revenueAs 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.
17 The Group 2005-06 2004-05 ROA 6.55% 7.38% ROE 9.29% 10.42% EPS (cents) The GroupROA6.55%7.38%ROE9.29%10.42%EPS (cents)101.7111Here 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.
18 Here is the Cash Flow statement of the group 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.
19 Consolidated Income Statement 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 million, while the decrease in operating profit is only 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.
20 Stock InformationHere a table that tells us the stock performance of the group during the 12 months period ending Feb. 28th, 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.
21 5-year Stock Price Trend 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.
22 List of Major Shareholders 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.
23 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.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.
26 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 millionJet fuel price risk managementSwaps and options contracts hedged up to 24 months forwardThe group has a 55% jet fuel hedge ratio at $81 per barrel.
27 Jet Fuel Price Risk (cont.) FY2006 operating profit = $1.213BFY2005 operating profit = $1.317BDropped $105 million (-7.9%)Mainly due to rise in higher jet fuel priceFrom this, one can see the profitability of the group lies mainly on the hedge strategy
28 Jet Fuel Price Risk (cont) Hedge by Mean of Platts Singapore (MOPS)As of March 31st 2006, the MOPS price USD $79.54Annualized volatility = 26.36%Risk free rate = 2.4%
29 Jet Fuel Price Risk (cont) On 26 April 2006, the Company announced an increase of the fuel surcharge on tickets sold from 15 May 2006The 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.
30 Jet Fuel Price Risk (cont) Net fair value gain of $82.2m
31 Foreign Currency RiskForeign currency accounts for 65% of total revenue ( : 68%) and 69% of total operating expenses ( : 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.
32 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.
34 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
35 Interest Rate Risk (cont) Long-Term liabilitiesThe company’s finance lease commitments are charged at a margin above the LIBOR. These ranged from 3.19% to 5.18% ( : 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% ( : 1.15% to 2.65%) per annum.
37 Interest Rate Risk (cont) Long-Term AssetsNon-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% ( : 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 ( : $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% ( : 1.56% to 3.19%) per annum.
39 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% ( : 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% ( : 2.5%) per annum.
41 Market Price RiskPotential loss resulting from a decrease in market pricesSuch as lower airfaresThe Group owned $412.2 million (2005: $41.6 million) in quoted equity and non-equity investments at 31 March 2006.
42 Counterparty RiskSurplus 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.
43 Liquidity RiskAt 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.
44 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 deliveryit 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.
45 Other Possible RisksRisk management committee’s of the different subsidiaries and associated companies create the ability to react to unforeseen events such as9-11SARSIraq warBali bombing
46 Risk Management Governance SIA Board of DirectorsBoard Audit and RiskCommitteeSIA GroupRisk ManagementSIASIAECSATS GroupSilkAirSIA CargoOtherSubsidiaryRMC
47 Statement on Risk Management 1) Enhancement to Risk FrameworkIntro of strategic risks frameworkIdentify and report strategic risks and other long-term issues for senior management attention.Review of Risks to Singapore Airlines ReputationReview of Regulatory Compliance
48 Statement on Risk Management 2) Simulations and Tests of Risk ControlConducted throughout the year to test the effectiveness of risk controls and handling of business continuityThe exercise tested recall responses, communications systems, functional preparedness and management decision-making under simulated “crisis scenarios”.
49 Statement on Risk Management 3) Other Risk Process and ProgramAnnual Risk Management ReviewWhistle Blowing ProgramAll “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 ProceduresLenders to Singapore Airlines must be properly authorizedAll group companies/divisions has its own approved limits and procedures that must be followed
50 Statement on Risk Management 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.
52 Company profileSouthwest 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.
53 Executives Chairman – HERBERT D. KELLEHER CEO – GARY C. KELLY President and director – COLLEEN C. BARRETTCFO – LAURA WRIGHT
57 Competitive Strength Low Cost Leadership Productivity is the keyHigh asset utilizationPoint-to-point systemMore direct nonstop routingsEmployee Proficiency71 employees per aircraftLowest ratio since 1972
63 Risk Factor From company’s Annual Report: Southwest's business is labor-intensiveSouthwest relies on technology to operate its business and any failure of these system could harm the Company’s businessInsurance 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.
64 Risk Factor Jet Fuel Unpredictable price movement Unable to increase fares when fuel price riseChanges in hedging strategy and the effectiveness of hedging arrangement have significant impact on operating results
65 Risk Factor: Jet Fuel Anticipating higher jet fuel prices Not as strong hedge position and higher market price in 2006Lower hedge ratio and prices of hedges in place are higher
66 Purpose of HedgingAirline operators are inherently dependent upon jet fuel to operate, and therefore, impacted by change in jet fuel pricesJet fuel and oil consumed in 2005, 2004, and 2003 represented approximately 19.8%, 16.7%, and 15.2% of operating expenses respectivelyThe company endeavours to acquire jet fuel at the lowest possible cost
68 Hedging Strategy: Jet Fuel Hedge ratio:70% for 2006 at $36/barrel60% for 2007 at $39/barrel35% for 2008 at $38/barrel30% for 2009 at $39/barrelNear term hedge positions are in the form of option contractsLimit the cost of rising fuel price and benefit the company of declining fuel price
69 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
73 Cost Structure Operating Cost per Available Seat Mile (ASM) MOVE THIS SLIDE BEFORE JET FUEL COSTSouthwest's low cost structure is one of its primarycompetitive advantages and many factors couldaffect the Company's ability to control its costs.Factors affecting the Company's ability to controlits costs include the price and availability of fuel, resultsof Employee labor contract negotiations, Employee hir-ing and retention rates, costs for health care, capacitydecisions by the Company and its competitors, unscheduled required aircraft airframe or engine repairs,regulatory requirements, availability of capital markets,and future financing decisions made by the Company.
74 Cost ControlTo 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 agreementsHeadcount per aircraft decreased from 74 at Dec 2004 to 71 at Dec 2005Faced 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
75 Risk Factor 2 – Employment cost Historically, the Company's relationships with itsEmployees have been very good. However, the results oflabor contract negotiations (approximately 82% of theCompany's Employees are represented for collectivebargaining purposes by labor unions), Employee hiringand retention rates, and costs for health care are itemswith potentially significant impact on the Company'soperating results.
76 Employee Stock Option ESO subject to bargaining agreements Other Employee plansOptions granted at or above the FMV of the common stock6-12 years termsNeither Executive officers nor members of the company’s board of directors are eligible to participateOptions granted at the money10 years termsFully exercisable over 3, 5, or 10 years of continued employment
77 Employee Stock OptionThe 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 millionstock-based compensation utilizing the intrinsic valuemethod in accordance with the provisions of Accountyearsing Principles Board Opinion No. 25 (APB 25),Accordingly, no compensation expenseis recognized for fixed option plans because the exercisePrices of Employee stock options equal or exceed themarket prices of the underlying stock on the dates ofgrant. Compensation expense for other stock options isnot material.
78 Employee Stock Option 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 andare fully transferable.(For 2005, the Company relied onobservations of both historical volatility trends as well asimplied future volatility observations as determined byindependent third parties.)
79 Employee Stock OptionGiven that company current stock price is $15
80 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.Average 4.1 yearsRange from years
81 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.
82 Interest Rate riskLargest portion is Aircraft purchase commitments, following by long term debt
83 Interest Rate Hedging Interest rate swap Take advantage of short term rate significantly lower than fixed long term rateObjective 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.”The fair value of the interest rate swapagreements, excluding accrued interest, at Decem-ber 31, 2005, was a liability of approximately $31 mil-lion. The comparable fair value of these sameagreements at December 31, 2004, was a liability of$16 million. The long-term portion of these amountsare recorded in ""Other deferred liabilities'' in theConsolidated Balance Sheet for each respective year andthe current portion is reflected in ""Accrued liabilities.''In accordance with fair value hedging, the offsettingentry is an adjustment to decrease the carrying value oflong-term debt. See Note 10 to the Consolidated Finan-cial Statements.
84 Interest Rate Swap 6.5% 5.496% 5.25% Security Pay Floating rate Receive Fixed rate$385 million 6.5% senior unsecured notes due 2012(LIBOR) plus a margin every six monthsEstimated to be 6.46%6.5%$375 million 5.496% Class A-2 due 2006Estimated to be 6.73%5.496%$350 million 5.25% senior unsecured notes due 2014.average floating rateIn 2005 is 3.82%5.25%
85 Interest Rate Hedging Investments Net effect on interest rate The Company also has some risk associated with changing interest rates due to the short-term nature of its invested cashST invested cash $2.3 billionST 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 ratesNet effect on interest rateIncrease in interest rate: net +tv effect on earnings and CFDecrease in interest rate: net –tv effect on earnings and CFFV of interest rate swap as of Dec 31, 05 is:was a liability of approximately $31 millionThe Company also has some risk associated withchanging interest rates due to the short-term nature ofits invested cash, which totaled $2.3 billion, and shortTerm investments, which totaled $251 million, at December31, 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 floating-rate debt outstanding, anincrease in rates would have a net positive effect on theCompany's earnings and cash flows, while a decrease inrates would have a net negative effect.FV of interest rate swap as of Dec 31, 05 is:was a liability of approximately $31 million
86 Credit riskThe Company does not expect any of the counterparties to fail to meet their obligationsTo manage credit risk:selects and periodically reviews counterparties based on credit ratingslimits its exposure to a single counterpartyand monitors the market position of the program and its relative market position with each counterpartyThe 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 provisionsdecrease, but not totally eliminate, the credit risk associated with the Company's hedging programOutstanding financial derivative instruments ex-pose the Company to credit loss in the event of nonperformance by the counterparties to the agreements.However, the Company does not expect any of thecounterparties to fail to meet their obligations. Thecredit exposure related to these financial instruments isrepresented by the fair value of contracts with a positivefair value at the reporting date. To manage credit risk,the Company selects and periodically reviewscounterparties based on credit ratings, limits its expo-sure to a single counterparty, and monitors the marketposition of the program and its relative market positionwith each counterparty. At December 31, 2005, theCompany had agreements with seven counterpartiescontaining early termination rights and/or bilateralcollateral provisions whereby security is required ifmarket risk exposure exceeds a specified thresholdamount or credit ratings fall below certain levels. AtDecember 31, 2005, the Company held $950 million infuel hedge related cash collateral deposits under thesebilateral collateral provisions. These collateral depositsserve to decrease, but not totally eliminate, the creditrisk associated with the Company's hedging program.The cash deposits, which can have a significant impacton the Company's cash balance and cash flows as of and
87 Insurance Purpose of Insurance: General Coverage: protect the Company and its propertycomply 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 9-11Following the terrorist attacks, commercial aviationinsurers significantly increased the premiums andreduced the amount of war-risk coverage availablecommercial carriers. The federal Homeland SecurityAct of 2002 requires the federal government to providethird party, passenger, and hull war-risk insurance coverageto commercial carriers through a period of timethat has now been extended to December 31, 2006.The Company is unable to predict whether the governmentwill extend this insurance coverage past December 31,2006, whether alternative commercial insurancewith comparable coverage will become available atreasonable premiums, and what impact this will have onthe Company's ongoing operations or future financialperformance.
88 It is important to hedge and hedge appropriately ConclusionIt is important to hedge and hedge appropriately
89 Any questions or comments are welcomed! THE ENDAny questions or comments are welcomed!
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