Singapore Airlines Limited: Is There a Faint Glimmer of Light for the Airline?

There is no way around it. The COVID-19 pandemic has brought the airline industry to its knees.

All over the world, airline companies are reeling from the adverse impact arising from border closures and lockdowns.

Singapore Airlines Limited (SGX: C6L), or SIA, is no exception.

The group announced last month that it will operate just 7% of its scheduled capacity for August, up marginally from 6% in July.

As countries slowly open up, SIA hopes to be able to add more routes gradually, though it has been an arduous task managing the fallout from the pandemic.

Case in point, the carrier had cancelled 96% of all scheduled flights between late-March to end-May due to worldwide restrictions on air travel alongside a plunge in demand.

As a result, the airline moved to shore up its balance sheet in late March by conducting a massive 3-for-2 rights issue at S$3.00 per share.

Subsequently, the group reported its first-ever full-year loss for the fiscal year 2020 of S$212 million on a revenue base of S$16 billion.

Part of the loss was also attributed to S$710 million of mark-to-market losses on fuel hedges.

With such downbeat news swirling around the airline, could there be any light at the end of this dark tunnel?

Massive first-quarter loss

SIA released its results for the first quarter of the fiscal year 2021 last week.

It wasn’t a pretty picture, to say the least.

Total revenue plunged 79.3% year on year to S$851 million as passenger carriage dived by 99.5% for the group.

As a result, the airline booked an operating loss of S$1 billion and a net loss of S$1.1 billion.

In its outlook statement, SIA mentioned that the recovery in international air travel is slower than initially expected.

Industry forecasts have estimated that it may take up to two to four years for passenger traffic numbers to return to pre-pandemic levels.

Drastic measures

The continued challenging scenario for the industry has spurred the airline to take drastic action.

In late July, SIA announced bigger pay cuts for management, a 10% salary reduction for other staff, as well as early retirement for ground staff and pilots.

Previous cuts were in the range of 10% to 25%, but will now be increased to a range of 12% to 30% for all staff ranked managers and above.

At the same time, SIA is also reviewing the size and shape of its network by observing the impact of COVID-19 on passenger traffic and revenue.

This review will be completed by end-September and could result in significant changes to existing routes and flight paths.

Managing its balance sheet

SIA is now facing its worst crisis since its founding and must manage its balance sheet prudently to ensure it can survive.

As of 30 June 2020, cash and bank balances increased to S$9.6 billion, while total debt amounted to S$12 billion.

Since 1 April, SIA has raised approximately S$11 billion to boost the strength of its balance sheet.

Of this S$11 billion, S$8.8 billion was from the recently-concluded rights issue, while the remaining S$2.2 billion was from secured financing and new loans.

The debt-equity ratio for the group has also improved from 1.27 times to 0.68 times.

All existing committed lines of credit that were due to mature in the previous fiscal year have been renewed until 2021 or later.

These lines provide SIA with access to more than S$2.1 billion in additional liquidity.

Furthermore, for the period up till July 2021, the group has the option to raise to S$6.2 billion in additional mandatory convertible bonds should conditions deteriorate further.

Get Smart: Recovery not in sight for now

A new report by Moody’s has warned of a slow and painful for the airline industry.

It predicts that commercial aviation will be ravaged by the pandemic for years to come, with a best-case scenario for recovery by end-2023 at the earliest.

Even if the recovery comes sooner than expected, the industry could be irreversibly changed by this crisis.

New practices involving cleaning, sanitation, checking and testing of passengers may be instituted, raising the overall cost structure for airlines.

As of now, it’s also unclear if social distancing needs to be extended should the pandemic drag on, thereby decreasing the passenger capacity on all flights.

With so many uncertainties, it seems highly unlikely that SIA can witness a recovery in its fortunes anytime soon.

The group can survive through the crisis as it can tap on ample liquidity.

But whether the airline can thrive in the years ahead remains an open question.

Download your FREE special REITs report: “How You Can Make Money Investing In REITs During This Pandemic” HERE or in the box below!

We cover the pandemic’s impact on REITs in Singapore, and dive into the different sectors of Hospitality REITs, Retail REITs, Commercial REITs, Industrial REITs, Healthcare REITs.

Disclaimer: Royston Yang does not own shares in any of the companies mentioned.