In the wake of the recent retrenchment exercise, the big question facing Singapore Airlines (SIA) is whether it needs to raise cash again soon. The national flag carrier has been flying at about 10% of capacity as borders remain mostly shut to halt the spread of the Covid-19 pandemic. Yet the airline still has to pay salaries, and cover expenses, financial obligations and other fixed costs.
As at FY2020 ended March 31, SIA had $5.05 billion in current trade-related liabilities, including $2 billion in advance bookings. It also has $1.6 billion in derivative liabilities. UOB KayHian estimates that SIA would have at least a further $6 billion in payables by the current financial year-end. This is even assuming the derivative liabilities diminish in value.
SIA also had $2.7 billion in short-term debt as at end-FY2020, though UOB KayHian believes this has been fully repaid as at Aug 20. In addition, the brokerage estimates that SIA would be burning $200 million to $300 million per quarter from an operating perspective, inclusive of lease payments for 2QFY2021 and 3QFY2021.
However, as at Aug 14, SIA had already burnt half of the $8.8 billion proceeds raised from a rights shares and mandatory convertible bonds (MCBs) issue undertaken earlier this year. Of this, $2.9 billion was used for debt repayment and $1.1 billion for ticket refunds and settlement of fuel hedging contracts. The remaining $400 million was used equally to acquire new aircraft and pay operating expenses.
SIA has other avenues for cash, but it is not immediately clear if they have been utilised yet. The airline had raised a further $900 million through long-term loans secured on some of its Airbus A350-900 and Boeing 787-10 aircraft.
It also arranged a sum of over $500 million worth of new committed lines of credit and a short-term unsecured loan with several banks. Separately, SIA also ensured continued access to over $1.7 billion by renewing existing committed lines of credit that were due to mature in 2020, until 2021 or later.
The way UOB KayHian sees it, the airline might still face a shortfall in the short term. “SIA could potentially exhaust its $8.8 billion in rights and convertible debt proceeds by [end-FY2021] unless it manages to defer a large part of the $2.0 billion in advance payments for flights,” UOB KayHian analyst K Ajith wrote in a note dated Sept 11.
Differing views
However, other aviation experts who spoke to The Edge Singapore have different views. Brendan Sobie, an independent aviation analyst and consultant, stresses that SIA does not need to raise funds anytime soon. He says investors should not assume that the airline will burn through the remaining half of its rights and MCB proceeds at the same rate as before. Rather, they need to understand that some of the items spent are not likely to recur, he explains.
SIA’s fuel hedging ineffectiveness is one example, Sobie says. Because the airline had fuel surplus from a drastic plunge in air travel coupled with an over-hedged position, it had to recognise that loss based on accounting standards, he says. But as air travel is still muted in the foreseeable future, the airline is unlikely to have fuel surplus and thereby over-hedge like it did.
In any case, Sobie points out that SIA has the option to issue additional MCBs amounting to about $6.2 billion. “When you factor in optional convertible bonds, which is already like a deal that’s done, they just have to pull the trigger, if they want to,” he says. “It’s not like they’re going to collapse if they don’t raise more capital, which is the situation [for] a lot of airlines in Asia right now.”
Shukor Yusof, founder and analyst at aviation advisory firm Endau Analytics, shares a similar view. “I suspect SIA will have to go to the capital market again, but not so soon, if the situation with Covid-19 shows no sign of a marked improvement — that is continued restrictions on international travel [and] border closures,” he says.
Yet even if such restrictions were to be lifted, the recovery will be slow, according to Lim Boon Chai, managing partner at aviation consulting firm To70. Demand for travel is unlikely to reach pre-Covid-19 levels immediately, he says. Depending on SIA’s ticket sales to cover the cost of sales and operating expenditure then, the airline may need to make another cash call, he reckons.
Peter Harbison, chairman emeritus of the Centre for Aviation (CAPA), agrees. He points out that flight networks will be sparse for “some time”, though some “smaller corridors” will open. Flights for the latter, however, will be expensive given the weak economic conditions, he says. “In those circumstances, it would probably be prudent to prepare for additional reserve funding and I imagine there would be contingency plans in place.”
So, if and when SIA makes a cash call, what would be the airline’s best form of financing? Shukor says it will not be difficult for the airline to raise funds — be it in debentures, equity or just plain-vanilla financing. The airline has a strong brand and credit profile, he notes.
If SIA chooses to take the equity route, Harbinson believes it is essential for Temasek to lead the fund-raising exercise again. However, the state investment company kept mum when asked if it would pump in more money for the airline. “SIA is managing its capital as best as it can,” Dilhan Pillay, executive director and CEO of Temasek International, told reporters on Sept 8. “They have a resilient workforce, you know, and I believe that they will come up with a way in which, when the post-Covid world allows travel to come back in, they will be able to continue operations.”
Lim, however, thinks any additional equity fund-raising will be “frowned upon” because it signals a negative outlook. Compared to the recent rights issue, the take-up is unlikely to be favourable. “Basically, it will convey to people that [SIA] sees no end in sight,” he says.
Obtaining secured financing by collateralising its aircraft might be a better option, says Joshua Ng, engagement manager at Alton Aviation Consultancy. He notes that SIA traditionally owns its aircraft and has thus far faced no problem in obtaining secured financing. Moreover, with Temasek Holdings as its parent company, the airline should be able to obtain favourable financing terms. “So, they have the opportunity to raise more cash, if needed, to tide them through this period,” he says.
Ultimately, if worse comes to worst, Temasek, which owns 55.75% of SIA, has the option to nationalise SIA and prevent it from collapsing, says Lim. But he reckons such a drastic measure will be taken only as a last resort.
Challenging outlook
In the meantime, SIA will cut up to 2,400 jobs across its airlines to reduce costs. These include positions in Singapore and overseas stations. A further 1,900 jobs were already eliminated, after accounting for a recruitment freeze, an early retirement scheme for ground staff and pilots, and a voluntary release scheme for cabin crew. According to SIA’s most recent annual report, it had a total headcount of 27,619.
SIA says the jobs retrenchment decision was taken considering the “long road to recovery” for the global aviation industry and the urgent need for its airlines to adapt to an uncertain future. “Having to let go of our valuable and dedicated people is the hardest and most agonising decision that I have had to make in my 30 years with SIA,” Goh Choon Phong, SIA’s CEO, said in a Sept 10 statement. “This is not a reflection of the strengths and capabilities of those who will be affected, but the result of an unprecedented global crisis that has engulfed the airline industry.”
The airline is still expecting to operate under half its capacity by the end of FY2021, compared to pre-Covid-19 levels. Its operating statistics in August remained weak. Across all its airlines, SIA’s capacity plunged 92.2% y-o-y to just 1,190 available seat per km. It carried just 39,800 passengers during the month, down 98.8% y-o-y, from 3.3 million passengers. SIA’s passenger load factor was just 18.8%, down from 86.4% a year ago.
SIA will likely continue to report weak statistics ahead. According to the International Air Transport Association (IATA), global passenger traffic will not return to pre-Covid-19 levels until 2024. The bleak forecast is premised on three trends observed by IATA: the slow virus containment in the US and developing economies, reduced corporate travel and weak consumer confidence. A recovery in long-haul travel is expected to be slower than for short-haul travel, it says.
Still, Singapore has been trying to help SIA by allowing travel to certain countries. For instance, the city-state implemented a fast lane travel arrangement with China, its biggest trading partner, on June 8. It subsequently implemented a reciprocal green lane and periodic commuting arrangement with Malaysia on Aug 17. Singapore has also allowed general travel to Brunei and New Zealand on Sept 1, though SIA has recently suspended flights to the latter due to lack of demand. More recently, it announced a fast lane arrangement with South Korea and Japan that began on Sept 4 and Sept 18, respectively.
SIA is also doing what it can to generate revenue. The airline is reportedly planning to launch flights to nowhere that will take off from Changi Airport. “SIA is considering several initiatives that would allow us to continue engaging both our customers and members of the public,” the airline reportedly said in response. “We will make an announcement at the appropriate time if we go ahead with these plans.”
But such efforts are unlikely to bolster SIA’s financial performance and position significantly. CAPA’s Harbison says the financial returns are limited, though they keep the brand alive, give operational crews flying hours and help improve staff morale.
Shares of SIA were down 44.3% year-to-date to close at $3.55 on Sept 16.
