SIA slashes capacity by 96%; group's cost cuts to affect 10,000 staff

Singapore

BATTLING its biggest crisis to date, Singapore Airlines (SIA) is making crippling capacity cuts to its network as well as initiating deeper salary reductions for senior management and introducing compulsory no pay leave for employees as international travel comes to a grinding halt.

With countries worldwide tightening their borders to contain the Covid-19 pandemic, Singapore's flag carrier said it would slash capacity by 96 per cent until end-April, up sharply from planned cuts of 50 per cent previously. As a result, it will have to ground 138 SIA and SilkAir planes from their combined fleets of 147 aircraft, leaving nine operational passenger aircraft. The Business Times (BT) reported on Monday that the airline group is looking into storing some of its planes, including its jumbo Airbus A380s, in the face of vanishing travel demand.

Its low-cost carrier Scoot is suspending the vasty majority of its network and grounding 47 of its 49 aircraft, though SIA Cargo continues to operate its seven freighters.

Separately, BT has learnt that chief executive officer Goh Choon Phong will now be taking a bigger salary cut of 30 per cent from Apr 1, up from 15 per cent previously. Executive vice-presidents and senior vice-presidents will take cuts of 25 per cent and 20 per cent respectively, instead of 12 per cent and 10 per cent. Meanwhile, SIA's board members are now taking a 30 per cent cut in fees in solidarity with the company.

Other affected staff will see salary cuts of 10-12 per cent, larger than the 5-7 per cent planned earlier.

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According to a message from SIA's chief to employees which was seen by BT, the airline group has also reached agreements with its unions on cost-cutting measures, which include voluntary no-pay leave for all staff up to divisional VPs, varying days of compulsory no-pay leave each month for pilots, executives and associates, as well as furlough for staff on re-employment contracts. All in, about 10,000 staff will be affected by this.

In the memo to staff, Mr Goh said: "We must all brace for even greater sacrifices going forward, given the uncertainty over how long the Covid-19 outbreak will continue to ground our business."

However, he went on to highlight that the group would use this time and the resources available to restructure work and boost productivity. SIA's transformation office will be taking the lead in finding solutions to help the group maintain its competitive edge.

The aviation industry is a direct casualty of the widespread travel restrictions, forcing airlines worldwide to drastically slash their network and ground planes. A good number of carriers are also lobbying for bail-outs, while others have already warned that the dire business environment would make layoffs and furloughs inevitable.

Here, the government has shut the border to tourists and transit traffic starting 11.59pm on Monday, which will dry up what's left of travel demand for Singapore's air hub.

The International Airport Transport Association has warned that the world's airlines will need up to US$200 billion in aid from governments to save the aviation industry.

For SIA, the lack a domestic market in Singapore also means that the flag carrier is hit harder than others, which will cause passenger revenues to nosedive.

SIA's revenue for the fourth quarter ended Mar 31, 2020, will decline by at least S$1 billion, estimates UOB Kay Hian transport analyst K Ajith. Meanwhile, the revenue shortfall for April alone could top S$1 billion, given the latest wave of capacity cuts. For the third quarter ended Dec 31, 2019, SIA earned revenues of about S$4.47 billion, and a net profit of around S$315 million, suggesting a loss is imminent for the fourth fiscal quarter. Some analysts are also forecasting a full-year loss for FY21, which would be SIA's first.

Aside from plunging revenue, the group is also staring at fuel hedging losses from hedging its fuel needs which are now above the spot rate of US$34/barrel for jet fuel after oil prices recently collapsed following the Saudi-Russia spat. SIA's balance sheet could also get hit by marked-to-market losses of S$2.5 billion by end March.

Having drawn on its lines of credit in the last few days for its immediate cash flow requirements, SIA said it is actively taking steps to shore up its liquidity and is in talks with several financial institutions for funding. It is also working on deferring capital expenditure, speaking to plane-makers Airbus and Boeing to push back upcoming aircraft deliveries and as a result, defer payment.

Highlighting that the airline faces severe liquidity issues, Mr Ajith said: "Assuming that SIA manages to reduce its aircraft capex commitment by 50 per cent, we estimate that the carrier would require at least S$5 billion in new funding via debt markets or an equity cash call."

While the lack of earnings visibility makes SIA a risky stock bet for now, loan support from the government coupled with waivers on airport charges and levies for a year would reduce the perceived risk on SIA, he added. Reduced airport levies alone would translate to S$400 million a year in savings for the airline.

As at Dec 31, 2019, SIA had cash and cash equivalents totalling S$1.57 billion.

The counter tumbled 66 cents, or 11 per cent, to close at S$5.36 on Monday.