You are here
SIA will remain prudent, steadfast and agile
WE refer to Tay Peck Gek's Hock Lock Siew column titled "Weak travel issue aside, SIA has major problems to fix".
Today, the SIA Group is facing the biggest challenge in its history due to the unprecedented impact of the Covid-19 pandemic on international air travel.
Pre-Covid, during the third quarter of FY19/20 (October-December 2019), the Group posted record quarterly revenues, passenger uplift, capacity and traffic numbers.
It also achieved the highest passenger load factor for a third quarter and one of the best quarterly profits in its history.
Driving this was a successful strategy of diversifying and strengthening its network through organic growth and airline partnerships, a gradual increase in capacity that was backed up by a renewal of the fleet, and initiatives that were undertaken as a result of our transformation programme.
Partnerships, commercial joint ventures and equity investments with other airlines have enabled the Group to strengthen its network in Singapore, and provided greater access to key markets.
The investment in Virgin Australia, for example, provided connectivity to feed SIA's long-haul network. It enabled the Group to significantly grow its presence in Australia, and resulted in it serving the most points in the country of any foreign airline group pre-Covid.
Investment in new-generation aircraft, both as a replacement for the existing fleet and for growth, enables SIA to adopt the latest-generation technology that provides an enhanced travel experience to our customers, offers better operating efficiencies and significantly lowers emissions. Performance improvements from new-generation aircraft also enabled SIA to further expand its network, for example in re-launching non-stop flights to the United States.
The Group had been on a period of higher capital expenditure on new-generation aircraft starting in FY18/19, to drive a higher level of growth. This was supported by the market, given the record load factors that were reached pre-Covid. The rate of capital expenditure on aircraft was originally planned to peak in FY20/21, and begin to decrease after that.
Given the impact of Covid-19, our aircraft delivery stream will need be deferred. We have reached an agreement with Airbus on this, while negotiations continue with Boeing. The long-term rationale for fleet renewal, however, remains valid.
Fuel hedging helps to reduce the volatility of our single largest operating cost item, and allows the Group to better focus on sales and marketing activities in response to changes in the market and competition. The nature of hedging is such that in a period of rising fuel prices, in general, the fuel hedges would incur hedging gains. On the other hand, if fuel prices decline, the fuel hedges incur hedging losses.
The Group only hedges a portion of its planned fuel consumption. This means that in a period of rising fuel prices, the Group's fuel cost does go up, but by less than if it were not hedged. Conversely, in a period of declining fuel prices, fuel cost overall goes down, but by less than what it would be if we were not hedged. The result of hedging is therefore reduced volatility in the impact of fuel price movements on the profit and loss statement.
The Covid-19 pandemic led to a sharp slump in the demand for oil in March 2020, and that took place amid an unexpected price war and a supply glut. As a result, oil prices plunged. This led to the Group recognising fuel hedging losses on contracts that were expiring over the last two fiscal quarters.
In addition, the Group had to significantly cut capacity as a result of the pandemic. Today, it is operating only 8 per cent of capacity, compared to pre-Covid levels. The Group projects that it would be at less than 50 per cent of capacity at the end of FY20/21.
As indicated in prior results announcements, this will lead to lower fuel consumption than previously anticipated, based on pre-Covid conditions, causing the Group to be in an over-hedged position for the first time in its history and thereby requiring it to record significant mark-to-market losses.
Given the uncertainty in the capacity that we can deploy and therefore fuel consumption, the Group announced in April 2020 that it has taken a pause in fuel hedging activities. The Group has always been transparent about its fuel hedging policy and this has also been covered extensively by the media and investment analysts.
The SIA Group is extremely grateful for the support of its customers, shareholders, staff and members of the public. We never take it for granted, and we will continue to work very hard to retain their trust. The Group will remain prudent, steadfast and agile during this period of great uncertainty, and will continue to act nimbly in responding to evolving market conditions.
Tan Kai Ping
Executive Vice-President for
Finance & Strategy