SINGAPORE (May 22): Since its inception in 1972, Singapore Airlines (SIA) has weathered through all kinds of downturns that had impacted air travel. This included the Sept 11 terrorist attacks in 2001, the SARS epidemic in 2003 and the global financial crisis in 2008.
But the Covid-19 pandemic, which has shut down economies and grounded air travel worldwide, is proving to be the biggest challenge ever faced by the national flag carrier.
Owing to the unprecedented collapse in air travel since March, SIA’s revenue tumbled 21.9% y-o-y to $3.18 billion in the fourth quarter ended March 31, from $4.08 billion in the same period a year ago. The airline was also caught in an over-hedged position, no thanks to the plunge in crude oil prices. SIA was forced to record a fuel hedging ineffectiveness of $709.8 million.
As a result, SIA incurred a loss of $732.4 million in 4Q — the sixth quarterly loss in its entire history, according to Bloomberg data. The airline previously suffered quarterly losses in 2017, 2012 and 2004, and twice in 2010.
To make matters worse, the weak 4Q figures led SIA to record its first ever full-year loss of $212 million. Top line improvement made during the first nine months was also wiped out, causing full-year revenue to decline 2.1% y-o-y to $15.98 billion from $16.32 billion. Meanwhile, operating cash flow dwindled 2.5% y-o-y to $2.73 billion from $2.8 billion, while its net debt nearly doubled to $7.14 billion as at March 31 from $3.71 billion a year ago.
Unsurprisingly, SIA’s share price has fallen 43% year-to-date to close at $3.64 on May 21. At that price level, the stock was trading at 0.66 times book value. As the airline has decided not to declare a final dividend, total dividends for the year were just 8 cents a share, down from 30 cents a share a year ago. That has given the stock a yield of 2.2%.
To strengthen its balance sheet, SIA has undertaken a renounceable rights issue of new shares and mandatory convertible bonds (MCB) to raise up to $15 billion. Shareholders will be eligible for three rights shares for every two existing shares they own. At the issue price of $3.00, this represents a 53.8% discount to its March 25 closing price of $6.50 and a 31.8% discount to the theoretical ex-rights price (TERP) of $4.40 per share. The 10-year rights MCB will be issued at a denomination of $1 each on the basis of 295 MCB for every 100 existing shares. The last day to subscribe to the rights issue and MCBs is on May 28.
Following SIA’s results and cash call, a handful of analysts have turned optimistic. Both UOB KayHian and CGS-CIMB Research have upgraded their ratings to “buy” or equivalent from “hold”, previously. However, there are more analysts who are not so sure. Eight of them have “hold” ratings, while two others are calling for “sell”, according to Bloomberg data.
UOB KayHian says that at current levels, the negatives are fully priced in for SIA, though the airline is at a critical crossroad. “While a recovery in air travel will be gradual, we believe that confidence will rise once a vaccine for Covid-19 is implemented,” UOB KayHian analyst K Ajith wrote in a May 18 report.
CGS-CIMB says SIA’s “deeply-discounted” share price may recover once the Covid-19 pandemic eases. “Investors with a high-risk tolerance and a one-year investing horizon can accumulate SIA for the eventual relaxation of Covid-19 restrictions and a share price relief rally,” CGS-CIMB analyst Raymond Yap wrote in a May 15 report.
However, like many of its cautious peers, OCBC Investment Research has maintained its “hold” rating for the stock. “SIA indicated that the outlook remains uncertain and could see extension of capacity cuts beyond June if border controls and travel restrictions remain in place. Earnings visibility remains low in the near-term and investors have to be prepared for the volatility ahead as the situation remains fluid,” OCBC analyst Chu Peng wrote in a May 19 note.
So, should investors accumulate the stock or ditch it? How quickly can the broader aviation industry recover? How is SIA adapting its operations in the meantime?
‘Travel bubble’
SIA is a full-service carrier and has two other subsidiary airlines — SilkAir and Scoot — which cater to different segments of the market. Unfortunately, with no domestic market, SIA’s total reliance on international air travel puts its recovery at the mercy of local and foreign border controls.
Fortunately, on May 19, the Ministry of Health (MOH) said that the government will gradually re-open Singapore’s borders for essential travel. This will be done in a “careful manner” with the necessary precautions and safeguards in place.
“For example, Singapore is currently exploring the possibility of piloting green lane arrangements with a few countries assessed to be at equivalent or lower risk of community transmission as Singapore, for which essential travel in limited numbers and with safeguards, could be conducted safely. We will consider expanding such arrangements gradually as global conditions improve,” MOH says in a statement.
These countries could possibly refer to South Korea, Australia, New Zealand, Canada and Japan. Minister of Trade and Industry Chan Chun Sing on May 3 mentioned that he was in talks with his counterparts from these countries on the resumption of essential air travel. While he did not provide a timeline on when essential air travel will resume, he said that the “groundwork” was in preparation.
Nevertheless, for several reasons, international air travel will take longer than domestic travel to resume. Lim Boon Chai, managing partner at aviation consulting firm To70, says establishing a “travel bubble” among a selected group of countries would require all its members to abide by a common framework, which will define standard operating procedures to prevent the next wave of Covid-19 infections.
Lim estimates that the drafting, finalising and adoption of the framework may take eight to 12 months. Besides the aviation industry, healthcare experts and other bodies and agencies will want their say. Moreover, national interests will be at play, he adds.
Joshua Ng, engagement manager at Alton Aviation Consultancy, says governments are likely to take into consideration the existing bilateral trade with each country. After all, there is no point establishing connectivity if there is not significant business activity between each country. They may also need to figure out the right balance of flight frequencies per route for each national carrier.
Another consideration would be the level of competency of each country in handling imported Covid-19 cases and preventing further spread. This would include the testing and isolation capabilities of each country, he says.
Lim, however, warns that a travel bubble framework may discourage more than encourage the resumption of air travel. For example, air travellers may need to be quarantined for 14 days and conduct a swab test prior to travel or upon reaching the destination. Worst, these measures may be implemented at both origin and destination countries. “That would be a dampener on travel demand, even if you have a travel bubble,” he tells The Edge Singapore.
Still, some air travel is better than no air travel. Lim notes that the aviation industry cannot afford to not restart. Otherwise, the crisis will deepen, and a subsequent recovery will take longer to occur.
The International Air Transport Association (IATA) concurs. “We have a small window to avoid these mistakes with COVID-19 by agreeing global standards for a restart. In doing so, we must build-in measures for continuous review so that we can streamline the system as science and technology evolve,” Alexandre de Juniac, director general and CEO of IATA, said at a May 19 briefing.
“The restart will go much more smoothly if governments cooperate. We must avoid the mess that followed 9/11 when governments acted unilaterally. This created confusion for airlines and travellers alike. And it took many years to clean-up,” he adds.
Riding it out
Undoubtedly, SIA CEO Goh Choon Phong will have his work cut out for him. Goh says there are many unknowns. “Is it going to be a U-shaped recovery? Will it be a V-shaped or W-shaped recovery? Will there be reinfection? We don’t know that,” he tells a May 15 briefing.
Goh says consumer behaviour is likely to change post Covid-19 given that many business activities are taking place online. “The question is how much of that will continue post Covid-19. That is still an unknown because some of the businesses are really looking forward to re-establishing physical meetings and contact. But there is also the question of how company policies on travel might change,” he says.
To generate some revenue, SIA has been carrying more cargo than passengers of late. The airline has helped ferry food stuff, medical supplies and personal protective equipment. “In fact, we have also gotten approval to have cargo carried in the cabin itself both strapped on the seat and in the overhead cabin. That allows us to maximise our revenue opportunities when it comes to cargo. We look forward to more opportunities,” he says.
Still, SIA’s capacity will likely not return to levels seen prior to the Covid-19 pandemic in the near term, according to Lee Lik Hsin, executive vice president (commercial). Currently, the airline has capacity of just 4% of what it used to operate before the crisis and Lee says capacity will not resume to pre-Covid-19 levels in the next six to 12 months.
Meanwhile, SIA will continue to replace older aircraft with new ones as it has done in recent years. The airline has previously projected several years of capital expenditure totalling $24.4 billion, but that may change. Stephen Barnes, SIA senior vice president (finance) says the airlines is in renegotiations with Airbus and Boeing.
When asked if the airline will retire more of its Airbus A380 planes, which some airlines have found to be uneconomical to run, Goh would only offer a vague response. “Each aircraft serves a purpose. A380 has been serving strong and dense routes. However, the pace of recovery is uncertain… so we will continue to look at what we need to do in terms of meeting the fleet requirements and market outlook,” he says.
SIA is also looking at further reinforcing its cash flow, by considering tapping secured debt as well as sale and leaseback opportunities. But the airline needs to be flexible and “nimble”, as the debt market is “more limited for the aviation sector”, says Tan Kai Ping, SIA senior vice-president (marketing planning).
All in, the outlook for SIA is certainly cloudy, given many uncertainties and moving parts. Investors, who decide to buckle in, will need a strong stomach for a turbulent ride ahead.
