Covid-19: After first full-year loss, SIA boss says S$15b cash boost to put carrier in ‘position of strength’
SIA chief executive officer Goh Choon Phong said the carrier will be in a strong position after a share and bond sale set to raise up to S$15 billion.
SINGAPORE — A day after Singapore Airlines (SIA) posted its first full-year loss, the carrier on Friday (May 15) assured investors that a move to raise up to S$15 billion in fresh funds will put its financial books in “a position of strength” for whenever and however the aviation industry gets going again after the Covid-19 crisis.
SIA chief executive officer Goh Choon Phong was giving a virtual briefing for the media and analysts on Friday as the large-scale money-raising exercise, backed by majority shareholder Temasek Holdings, gets underway on the Singapore Exchange, where SIA’s shares are publicly traded. It closes on May 28.
Despite SIA’s strong position relative to other airlines, the group, which posted a S$212 million net loss for its financial year ending March 2020, is fully aware that Covid-19 is unlike previous crises faced by SIA, such as the severe acute respiratory syndrome (Sars) in 2003 and the global financial crisis in 2008, said Mr Goh.
The loss is the first in SIA’s 48-year history — almost all incurred in the final quarter ending March 31, and coinciding with the Covid-19 outbreak that reversed the group’s strong performance in the first nine months of the financial year.
A significant portion of the loss — S$710 million — was due to “unrealised” losses in fuel hedging owing to an unexpected oil price war and the decline in fuel use, noted the group’s chief financial officer Stephen Barnes.
Airlines routinely lock in fuel prices in advance so they can manage costs, but the fall in the price of oil has meant SIA has had to pay more than the current market rate.
This S$710 million impact on SIA’s cash flow will be spread over the years when the unrealised losses play out, said Mr Barnes.
Unlike other national carriers, SIA’s finances are not cushioned by any domestic flight routes which are typically the “last to close and first to reopen” in a pandemic scenario, making the group more vulnerable than others, said Mr Goh.
Amid the global collapse of the travel industry, SIA had to cut its capacity by a “drastic” 96 per cent as border controls and travel restrictions sprung up all over the world, he added.
RIGHTS' ISSUE
To tide the group through the pandemic, the airline is offering existing shareholders the right to buy three new shares at a price of S$3 a share for every two shares they already hold. This is known as a rights’ issue.
Shareholders may exercise this right until May 28. It is usual for rights' issues to be offered at a discount to the prevailing share price.
SIA shares closed nine cents higher at S$3.90 on Friday after sinking to a 30-year-low of S$3.81 on Thursday.
Besides the issuance of new shares, SIA can also exercise a future option of selling an instrument known as a convertible bond, also to existing shareholders, totalling S$6.2 billion.
In all, SIA hopes to raise up to S$15 billion, of which S$8.8 billion is from the rights’ issue, and the rest is from the additional convertible bonds sale.
One key factor in the money-raising exercise is that state investment company Temasek has pledged to exercise all its rights to buy shares. It controls about 55 per cent of SIA, so Temasek’s injection of funds will make up the lion’s share of the proceeds even if all other shareholders exercise their rights.
Mr Goh’s assurances about the group’s balance sheet come as investors queried the farsightedness of SIA’s fund-raising plans, questioning whether the funding is able to prop up the group for a prolonged outbreak.
On April 24, SIA responded to queries from the Securities Investors Association Singapore (Sias) about the fund-raising exercise. Sias expressed concern that the exercise would put downward pressure on the share price — which is already at a 30-year low.
Sias asked about “dilution” of share value, which refers to the idea that when you have more shares issued by a company, each share then represents a smaller slice of the business, which may drive its share price lower.
In response, SIA said that it needed the extra money to replace existing aircraft with new generation planes, for example, service debt and meet contractual obligations.
Out of the S$8.8 billion raised, S$3.7 billion will be used to fund the fixed costs and operating expenses incurred during the pandemic and its recovery period, S$3.3 billion will be used for aircraft purchases and aircraft-related payments, and the remaining S$1.8 billion will be used to service debts and other contractual payments.
At the briefing, Mr Goh said that as “we started out addressing the liquidity issue early on, we have had early success in securing funding and this put us in one of the strongest balance sheets in the industry at the moment”.
STRATEGY
Asked about how long the additional funding will be able to prop up the group, Mr Goh said that in addition to the S$15 billion fund raising exercise, the group is continuing with cost-cutting measures to conserve cash.
This includes pay cuts for management-level staff, as well as voluntary and compulsory no-pay leave schemes for all staff, he said.
Mr Barnes later added that most of the cash burn during the pandemic would be due to the fixed costs SIA needs to pay, such as the fixed wages for staff. Typically, fixed costs represent about a third of SIA’s expenditure in normal operating conditions.
In past crises and challenges in SIA’s history, including growing competition from Middle Eastern airlines, the group had adopted successful strategies to address these challenges, he said.
It has done so “prudently”, having maintained in excess of S$3 billion in liquidity at all times, said Mr Goh.
With Covid-19, the SIA chief said the group is preparing for a restart of global travel at some point, and it is putting in place the necessary changes over the next six to 12 months.
“Broadly speaking, nobody is sure how the pace of the recovery will be like and what are the regulatory requirements that other countries will put in place to address the need to contain the virus… We are keeping a close watch on the developments,” said Mr Goh.
In the shorter term, SIA has formed several workgroups looking into how aviation and consumer behaviour will change, such as the need for safe distancing measures needed on flights, and whether former business travellers will use video conferencing more after the crisis instead of travelling for face-to-face business meetings.
SIA has also received regulatory approval to “strap cargo on passenger seats”, said Mr Goh, noting that cargo demand has exceeded supply in some major freight lanes, including those with high demand for airflown medical supplies..
The long-term strategy involves looking into SIA’s strengths that would allow the group to come ahead of others in the global restart, he said. Mr Goh did not give any examples.
“Over the last three years of transformation, our staff has gotten used to a lot more new ways of doing things and being more agile. That commitment and those skill sets will be very helpful when we restart operations,” said Mr Goh.
He reiterated the importance of SIA’s strong balance sheet, as well as its growing digital capabilities over the years.
“All these attributes put us in a strong position for the restart as well as position ourselves for the longer-term success,” said Mr Goh.
