With prolonged turbulence, SIA likely to draw on further S$6.2b of bonds

WILL Singapore Airlines (SIA) need to tap its standby issuance of up to S$6.2 billion in mandatory convertible bonds?

UOB Kay Hian thinks so. It said in a report that if passenger load factor improves to above 40 per cent, the odds of an issuance would be reduced.

But given the bleak outlook for the industry, the flag carrier is likely to be in need of more cash.

The International Air Transport Association recently revised its forecasts to say that a return to the pre-pandemic level of passenger demand may only take place in 2024, a year later than previously projected.

This means the recovery runway has been extended for SIA and its peers. Indeed, SIA said in its recent update that its passenger capacity will recover to just 7 per cent by the end of the July-September quarter. By the end of the current financial year ending March 2021, capacity is expected to be less than half of its pre-pandemic levels.

The prolonged period of pain could be a drain on SIA's cash.

Of the S$8.8 billion in proceeds from its recent rights issue, SIA had earmarked S$3.3 billion for aircraft purchases and related payments, S$3.7 billion for operating cash flow, and S$1.8 billion for debt service and other contractual payments.

As at mid-June, S$2 billion had been used for bridging loan repayment and S$200 million for operating expenses, leaving S$6.6 billion of the rights proceeds. As at June 30, the group had cash and bank balances of S$9.6 billion and credit lines of S$2.1 billion available.

What are the operating expenses and other cash requirements it has? The scant financial information provided for Q1FY2021 may serve as a rough guide.

SIA flew 38,000 passengers in the quarter, versus 9.4 million in the corresponding period a year ago. Passenger load factor (that is, the percentage of available seating capacity filled by paying passengers) dropped by 73.2 percentage points year on year to 10.2 per cent. SIA operated at 4 per cent of its passenger capacity during the quarter, as many countries imposed border restrictions.

Consequently, the group recorded a 79.3 per cent plunge in revenue to S$851 million. Expenditure on the other hand, fell by a lesser 51.6 per cent to S$1.89 billion. SIA posted a net loss of S$1.12 billion.

In an April 15 trading update, the group had flagged that "many costs are unavoidable regardless of the number of flights mounted", despite the capacity cuts and other cost management measures that SIA had implemented then.

SIA's senior vice-president of finance had also said at an analysts' briefing in mid-May that fixed costs make up about 30 per cent to 35 per cent of total costs under normal operating circumstances.

Credit Suisse analysts estimated this at S$450 million a month or S$1.35 billion a quarter, operating at minimum capacity.

Assuming, then, revenue of S$850 million and fixed costs of S$1.35 billion, SIA's operating loss would be at least S$500 million a quarter. But as depreciation is a non-cash item, SIA could end up with an operating cash surplus of S$100 million a quarter. The company had booked S$600 million in depreciation in Q4.

This figure is theoretical, however, and does not account for various other unknown items. Some examples are fuel hedging losses and the impact of wage support from the government.

Potential for cuts

Of SIA's total expenditure for the April-June quarter, 33 per cent or S$619 million was fuel-related. This included S$464 million in mark-to-market losses from surplus hedges due to capacity reduction, as well as S$71 million in fuel hedging losses.

While the S$464 million in unrealised losses does not impact cash flow in FY2021, the S$710 million in mark-to-market unrealised losses that SIA recognised in Q4FY2020 could translate into cash outflow as contracts mature during the course of FY2021. Much depends on oil prices and SIA's fuel consumption rates.

The group has hedged 73 per cent of its anticipated fuel needs at average prices of US$74 per barrel for jet fuel or US$58 per barrel in Brent crude oil hedges for FY2021, and up to 59 per cent of its fuel needs at similar prices for the next four years to end-March 2025. Brent prices are now at about US$45 per barrel.

There is little that SIA can do about this line in its profit and loss.

The next largest item of expenditure is staff remuneration, which made up 16.1 per cent of total costs in FY2020.

As of end-March, SIA had 28,160 staff on its payroll costing S$2.56 billion, taking into account wage support of S$242.6 million.

The Q1 update did not have details on staff costs, but given that a significant portion of the income of the crew is from allowances that are tied to flying frequencies, and that SIA has instituted rounds of pay cuts, staff costs are likely to be much lower now.

SIA also has interest and debt repayments to service. Its debt balances stood at S$12 billion as at June 30, or S$200 million more than as at end-FY2020. Finance charges for FY2020 came up to S$221 million.

UOB Kay Hian estimated SIA would have S$4 billion in debt and lease repayments due by FY2022. Unless the group defers some aircraft deliveries, the brokerage believes it is likely to require more funds in FY2022.

Airbus had agreed to defer deliveries and the schedule of progress payments while SIA's discussions with Boeing are ongoing.

Is there more that SIA could do?

Given that the group is trying to conserve cash, SIA may want to rethink how it remunerates its helmsman and directors.

Chief executive officer (CEO) Goh Choon Phong was commendable to lead with a 35 per cent cut in his base salary. He drew S$1.4 million in base salary and annual wage supplement for FY2020.

But the former SIA scholar may want to follow the example of the CEO of loss-making Sembcorp Marine by taking a 50 per cent pay cut.

And, instead of paying out cash and shares of up to S$2 million for directors' emoluments, SIA could issue flyer miles or ask its directors to accept scrip alone. SIA had 12.9 million treasury shares as at mid-July.

Most of the eight directors who are remunerated hold full-time jobs, so they are unlikely to be dependent on this income.

These cash savings may be a drop in the ocean, but could save many low-paying jobs - especially when SIA has stressed that retrenchment is a last resort.