SIA's recovery flight may hit some pockets of turbulence

FLAG carrier Singapore Airlines (SIA) is taxiing on the runway of recovery, but there might be some speed bumps before the take-off.

The carrier reported a loss of S$427.6 million for the quarter to September, a significant improvement from the S$2.3 billion of red ink a year ago. Also, it's near breakeven after months of operating cash burn. This came as the carrier capitalised on the Vaccinated Travel Lane (VTL) tailwind brought on by Singapore's re-opening of its borders through the quarantine-free scheme - starting with Brunei and Germany in September.

SIA noted that passenger revenue increased in tandem with higher passenger traffic for the quarter, outstripping the rise in capacity. And it continued to see higher freight turnover as loads and yields were kept elevated by intensifying supply chain disruptions.

Going by these, the carrier seems to be poised for profitability, especially since VTLs have been launched for popular holiday destinations such as Australia, the United States and the United Kingdom.

Given the pent-up demand for travel, these VTL flights could begin lifting SIA's revenue significantly at its next quarterly business update.

The carrier's website was momentarily overwhelmed when VTLs for the US and major European nations were announced, which saw people flock to its service centre, desperate to get their hands on air tickets before they sold out.

Indeed, SIA was already reporting better operating numbers as a result of the travel scheme for passengers vaccinated against the coronavirus. The company's passenger carriage saw an uptick in September, especially to Germany; and a bigger rise of 13.9 per cent in October as VTLs for other Western countries were rolled out.

But challenges abound for SIA: operating costs are expected to be higher, some of the lucrative business travel demand might be lost permanently to online conferencing, and passenger traffic is at the mercy of the coronavirus and, in turn, border restrictions.

First, its operating costs rose with a higher passenger traffic in the latest reported quarter. Granted, it is the cost of doing business, but SIA should be prudent about investments, especially when it involves hundreds of millions of dollars, more so when the toughest year in its history is barely out of the door.

During a recent showcasing of the upgraded cabins of its Boeing 737-8 fleet, SIA's executive vice-president of the commercial division Lee Lik Hsin said the airline does not usually consider a return on investment timeline for its cabin products, but it is confident the S$230 million upgrades will improve customer experience and ultimately benefit the company.

Integral role

Lee also noted it was possible for the cabins to be upgraded because of the support from stakeholders, who had contributed to the company's ability to make such an investment.

No doubt branding and customer experience play an integral role in making SIA a leading airline. But as a matter of prudence - and basic finance - surely companies should work out the return timeline for every investment that is made.

Rising oil prices are another potential concern for SIA. The airline group's fuel cost climbed 31 per cent quarter-on-quarter, outpacing the 18 per cent improvement in its top line.

The company, having been burnt by hedging losses to the tune of hundreds of millions of dollars when oil prices tanked last year, has since reduced its hedging.

Specifically, it has cut its hedge position to 30 per cent to 40 per cent of its projected consumption, locking in fuel at certain price levels and closing out some positions through the sale of swaps.

However, with oil prices hovering at elevated levels, this is arguably precisely when SIA ought to be hedging more of its fuel costs.

SIA has said that it does not take a view on oil prices, and that its rationale for hedging is to manage price volatility for a main input cost item. Still, the carrier might have been better served if - instead of scaling back its whole hedge position and now be at the mercy of rising oil prices - it had bought some put options to mitigate the risk of softer oil prices.

Expenses aside, demand might never recover to levels SIA enjoyed before the pandemic. DBS noted in a recent report that SIA itself had said in a conference call that there could be permanent demand destruction in certain markets.

Business travel has been a lucrative segment for full-service airlines, but many corporates have come to embrace teleconferencing during the pandemic. The corporate sector might also eschew long-haul travel as part of the effort to reduce its carbon footprint.

It also remains to be seen how sustainable leisure travel demand proves to be, after the current pent-up craving has been satisfied.

The fact is that travelling is much-less convenient and more expensive - travel-related testing can cost as much as the airfare itself - than it used be.

This brings us to the uncertainty about Covid-19 itself, and the potential for new strains like the Delta variant to suddenly wreak havoc.

Austria, a non-VTL country, has gone into a national lockdown on Monday (Nov 22) as infection cases spiralled. Germany - Singapore's first VTL country - has said that it might follow Austria and implement such measures to curb the spread of the coronavirus. Some countries have also tightened the curbs on travellers from Singapore recently.

Adjusting travel policies

Acknowledging that it is these countries' prerogative to adjust their border measures, Transport Minister S Iswaran had also flagged that Singapore will adjust its travel policies based on the circumstances in other countries where needed.

Meanwhile, SIA might lose its slots at airports in Europe if the European Commission decides to compel airlines to meet a specified slot use threshold for take-off and landing, having suspended the rule after the pandemic hit. Push come to shove, SIA might fly empty planes to meet the slot requirements, which would weigh on its profitability.

With flight landscape shrouded by uncertainty, SIA should exercise prudence in the use of its cash - a limited resource and a key differentiating factor in times of crisis.