SIA defends planned aircraft purchases, expects 'substantial' hedging losses in fuel

Singapore

SINGAPORE Airlines (SIA) is standing by its plans to use a chunk of the proceeds raised from its upcoming S$8.8 billion rights issue to purchase aircraft, the carrier said in a bourse filing on Wednesday, which offered responses to shareholder concerns raised ahead of its extraordinary general meeting (EGM) on Thursday.

One question raised asked why a large proportion of the funds to be raised have been committed to capital expenditure such as aircraft purchases, and whether the carrier can delay the delivery of new aircraft.

To this, SIA replied that the purchase orders were placed in the past under a continuing drive to adopt new-generation aircraft to replace its existing fleet. Even under present conditions, the rationale for the purchases remained "valid", it said.

"These new-generation aircraft will provide an enhanced travel experience to our customers, thereby enabling SIA to maintain its leading industry position as one of the most awarded airlines globally. They will also provide better operating efficiency and lower emissions," SIA said.

The airline is also negotiating with aircraft manufacturers to adjust its delivery stream. This will be balanced "with the consideration that our fleet-renewal programme is an important part of SIA's strategy for long-term sustainability".

Another query centred on whether SIA will be required to mark down the values of these aircraft, given the potential collapse of airlines and cancellation of plane orders, and that the carrier had previously bought aircraft in anticipation of continued high fuel prices.

SIA said that it expects the aircraft to generate sufficient cash flows that, when discounted, would exceed their carrying amounts as at end-March. The assessment is being reviewed by external auditors as part of the ongoing audit for the past financial year.

Separately, SIA said it is expecting "substantial losses" on its surplus fuel hedges when they are marked to market as at end-March when the price of Brent oil was close to its 10-year low.

Asked how its fuel hedges will affect its bottom line and whether its fuel-hedging policy will change, SIA replied that it has paused its current hedging strategy and plans to monitor developments "before entering into any additional hedges".

However, it expects to maintain its fuel-hedging policy to mitigate the impact of volatility in fuel prices, it said. The carrier is now over-hedged with respect to fuel consumption, and will disclose further details on its hedges in its full-year results on May 14.

Another question was raised on whether SIA had considered issuing debt or taking on additional loans to raise capital instead of the rights issue. SIA responded that raising the proposed sum entirely through debt would have raised its leverage in a time of tight liquidity.

"Doing so would also have severely limited SIA's ability to raise additional debt funding in future. Moreover, such funding transactions would materially increase the airline's cash outflow obligations, both during this period when liquidity is severely challenged, and beyond."

Other queries included whether the S$3 rights issue price is in line with the market, and whether there are intentions to redeem the rights mandatory convertible bonds (MCBs) prior to maturity.

On the latter, SIA said that the pricing is in line with precedent rights offerings on the Singapore Exchange. On the rights issue price, it said that the MCBs are structured with a step-up yield beyond the fourth year, incentivising it to redeem them at the earliest possible date, especially if it can refinance them at a more competitive cost.

SIA's shares closed on Wednesday at S$6.09, up S$0.08 or 1.33 per cent.