Friday, November 6, 2020

The Big Read in short: Can SIA fly high again?


SIA recorded its first full-year loss of S$212 million for the 12 months ending March 31, after staying profitable throughout its 48-year history. Earlier in September, it announced plans to cut around 4,300 positions, affecting around 2,400 staff.

26 September, 2020

Each week, TODAY’s long-running Big Read series delves into the trends and issues that matter. This week, we look at the challenges faced by Singapore Airlines amid the Covid-19 crisis and how it can recover post-pandemic. This is a shortened version of the full feature,​ which can be found here.

  • Covid-19 had hit SIA like a bolt from the blue, at a time when it was facing mounting competitive pressures
  • The pandemic hit SIA squarely on its core business model of premium, long-haul international flights — the first to be cancelled and likely the last to be restored
  • Changi Airport air hub status is not guaranteed post-pandemic, as technological trends and alternative hubs pose a threat
  • When the restart comes, SIA will need ready and trained personnel to jump on the wagon
  • Global debate ongoing over the role of flag carriers, as the aviation industry is expected to consolidate in the months and years ahead.

SINGAPORE — Despite the odds in its early years in the 70s, Singapore Airlines (SIA) quickly became a runaway success, standing out from its rivals by going against the grain in many ways.

To Singaporeans, its fortunes also put the Republic on the world map, and came in tandem with the rise of Changi Airport as an aviation hub.

“You may have never been to Singapore. But you would have heard of SIA, or flown with them before,” said Mr Priveen Raj Naidu, an independent aviation analyst.

But the good times have become a distant memory. as the Singapore icon now faces a storm unlike any other it had encountered before. Covid-19 had hit SIA like a bolt from the blue, and at a difficult time.

The national carrier’s chief executive officer Goh Choon Phong called it “the greatest challenge in the SIA’s Group’s existence” in an internal memo to his staff in March, as international travel came to a virtual halt due to the pandemic.

SIA recorded its first full-year loss of S$212 million for the 12 months ending March 31, after staying profitable throughout its 48-year history. Earlier in September, it announced plans to cut around 4,300 positions, affecting around 2,400 staff.

Compared with its rival airlines, Covid-19 has clipped SIA’s wings more severely, said aviation insiders, SIA cannot simply weather the storm by hunkering down, as it has to do more to become a game changer like before, aviation insiders told TODAY.

Institute of Policy Studies senior research fellow Dr Faizal Yahya said: “The fact is SIA had succeeded (thus far), despite the twin Gordian Knot of the lack of domestic market and oil resources. Their competitors have these in abundance, therefore, SIA’s strategy has to evolve beyond the premium passenger segment.”


Before Covid-19 struck, SIA was already facing mounting competition from its rivals.

A 2014 study of SIA successes in achieving consistent profitability amid the competition found that the airline was able to do so through its ability to transcend “organisational paradoxes”.

Essentially, SIA was able to provide service excellence and innovation, while being a low-cost leader. This is a paradox since the former requires significant resource investment, which precludes the latter, said the study.

SIA managed this because it had one of the industry’s youngest aircraft fleets, a high proportion of long-haul flights, an efficient work culture, high staff productivity, as well as relatively conservative salaries.

But academics say that such success can only be possible temporarily, since it can be copied by the competition.  And in the last decade, a number of airlines have done just that, boasting SIA’s formula of award-winning services at a low cost.

NUS Associate Professor Nitin Pangarkar said: “There was increasing imitation of SIA’s premium strategy. Price competition was stiff, especially for the leisure customer segment.”

Examples include the emergence of Middle East carriers such as Qatar, Etihad and Emirates.

On the other end, low cost carriers have also challenged SIA and other full-service airlines as they focused on becoming cost leaders.

Despite the competition, SIA could still hold its own. The airline was set to make an operating profit of S$253 million in the first three quarters of its 2019/2020 financial year, until the onset of Covid-19 in the final quarter caused a S$803 million operating loss.

Mr Brendan Sobie, founder of Singapore-based independent aviation consulting and analysis firm Sobie Aviation, noted that SIA’s third quarter was one of the best in recent years.


SIA’s strategy relies on long-haul flights, business and premium travellers who use Singapore’s Changi Airport as a transit point in their journeys.

However, the recent development of newer, more fuel-efficient and longer range aircraft could enable SIA’s rivals to bypass Changi Airport altogether.

Case in point: Singapore was a common stopover for Europe-Australia flights, known as the “kangaroo route”, but Boeing’s new Dreamliner allowed rival Australian airline Qantas to launch a popular direct flight from Perth to London.

Dr Faizal said: “With better technology... alternative regional airports and rising business costs among other things, airlines need not use Changi Airport as a stopover. These are challenges for SIA to overcome and Covid-19 has accelerated the changes.”

Professor Martin Dresner from the Robert H Smith School of Business noted that given the perceived dangers of air travel currently, “passengers may prefer direct flights to their destinations, rather than connecting routes through a hub such as Singapore”.

In July, Minister for Transport Ong Ye Kung said Singapore cannot take for granted that it will remain an aviation hub even when the Covid-19 pandemic ends.

“Others will be vying for it. It's not something we take for granted. It’s something we fought for, and we’ve secured,” said Mr Ong.


As if the pre-existing challenges for SIA were not enough, the pandemic has turned the entire industry on its head. 

When Covid-19 hit, long-haul routes were the first to be cancelled and many airlines could operate only limited domestic flights. This hit SIA squarely, since it was dependent on long-haul flights and had no domestic capacity to rely on.

SIA will continue to face fierce headwinds even after the pandemic passes, said experts.

Business travellers are less willing to be paying more for premium seats amid a global recession and may curtail business travel entirely, said Prof Dresner.

In response to TODAY’s queries, an SIA spokesman said the airline adopts a portfolio strategy with a presence in both the full-service premium and low-fare segments, which allow it to meet demand when it returns.

SIA Group comprises the main SIA passenger arm, as well as its wholly-owned subsidiaries SilkAir and Scoot, which handle regional travel and budget travel respectively.

“Our extensive global network will also help us to flexibly deploy capacity to meet the demand from different markets as air travel slowly returns,” said the spokesman.

But also adding to SIA woes in this critical time is its fuel hedging strategy, which it needed to guard against unpredictable fuel price movements since the profitability of long-haul routes are more sensitive to fuel price hikes.

SIA buys fuel up to five years in advance — longer than most airlines — when it perceives the price of fuel to go up in future.

“But hedging is a double-edged sword. SIA has indeed struggled recently with hedging — so have many others,” said Assoc Prof Pangarkar.

The unexpected oil price crash earlier this year, due to disagreements between oil-producing countries as well as reduced demand caused by Covid-19, underpinned the weakness of this strategy.

From March 2019 to March 2020, SIA recorded a hefty S$710 million in losses due to ineffective fuel hedges that matured during the fiscal year, with more losses expected in future.


The IATA said in July that global passenger traffic is unlikely to return to pre-Covid levels until 2024, so all airlines are conserving liquidity by cutting costs.

Besides cutting passenger capacity, SIA has delayed non-critical projects, slashed its labour costs, and is negotiating with aircraft manufacturers to defer deliveries and payment of aircraft.

At the height of the pandemic from April to June, SIA saw its group revenue plunge by 79.3 per cent compared with the same period in 2019.

Group expenditures, however, did not come down as quickly, falling by 51.6 per cent year-on-year.. Together, this represented a S$1.1 billion net loss in the first quarter of SIA’s financial year.

Analysts said the lack of a domestic market for SIA is ultimately its biggest handicap, since it has limited its options to generate revenue.

Nevertheless, SIA sought to increase its air freight capacity, which yielded 173 per cent more revenue for SIA in the recent quarter. However, this is not a long-term solution, said Mr Naidu.

Another alternative revenue idea is SIA’s proposal for flights to nowhere, which has generated controversy due to its environmental impact.

Some analysts opposed the move, since Covid-19 rules on safe distancing and minimising oral communication could affect the customer experience and hurt the brand

But others, like former senior SIA executive Chow Kok Wah, said there will be hidden benefits to such flights — pilots and crew get to clock important flight experience and ground crews can continue to service the aircraft’s equipment.


Recognising the urgent need to strengthen SIA’s balance sheet, the airline in March aimed to raise around S$15 billion by issuing shares to existing shareholders and mandatory convertible bonds, with state investor Temasek Holdings pledging to mop up any remaining unsubscribed shares and bonds.

So far, it has raised S$11 billion, and SIA has an option to raise another S$6.2 billion in additional bonds.

The Singapore Government, through wage subsidies, rebates on aircraft parking charges and other relief measures, has also stepped in to aid the battered aviation sector. The government and shareholder support received by SIA has given the flag carrier a better footing, compared to other airlines.

Senior aviation strategist Gerben Broekema, who founded Netherlands-based Broekema Aviation Advisory Services, said this is unlike other flag carriers, which are already burning through their first wave of financial support.

Dr Faizal said: “SIA and Changi Airport are symbiotic to each other because they maintain and grow air connectivity crucial for Singapore… which is important for Singapore as a trade-dependent nation.”

Mr Chow added: “Without SIA, there is no aviation hub, hence the importance of ensuring SIA’s survival.”


The boost to SIA’s liquidity will help it stay on strong footing and ward off the shroud of bankruptcy, but the carrier needs to do more in order to also emerge stronger from the crisis, analysts said.

For one, SIA needs to start burnishing its post-Covid-19 brand reputation, convincing customers — loyal and new — that despite the pandemic, the airline is still a great way to fly.

And despite the direness of the situation and the job cuts which it had to implement, SIA has to ensure its pipeline of talent in the longer term is not disrupted, while keeping a ready pool of talent whom it can tap on when the industry recovers.

With the shock of Covid-19, as well as the high cost barriers to aviation education, gone are the days where flight captains, first officers and air traffic controllers are seen as desired occupations, said Mr Naidu.

Mr Abbas Ismail, course chair of Temasek Polytechnic’s diploma in aviation management, added that there will be major implications if youths shun the industry.

Beyond retaining staff, analysts called for a significant shake-up in traditional business models, which the pandemic would have made irrelevant.

Mr Chow said: “Even as the pandemic subsides there will be fits and starts as pockets of cases surfaces and countries react strongly. Even as Covid-19 fades away, authorities will be on the lookout for new diseases.”

There is also an ongoing debate about the continued role of bloated flag carriers that are artificially propped up by their governments, and an industry-wide consolidation is expected.

A post-pandemic SIA will thus look very different from its past self, though the transformation will not come easy. SIA has said it is reviewing its network over the longer term, and is expected to complete the review in six months’ time.

But if anyone can do it, it is SIA, in part due to the strong financial backing from the Government and investors, said Mr Chow.



[Should SIA have hit the 'Reset' Button?]

SIA’s financial strength a double-edged sword as regional rivals hit the reset button

By Brendan Sobie

The SIA Group incurred a S$1.123 billion loss for the June quarter and a S$732 million loss for the March quarter. However, it has raised more liquidity than any airline group in Asia Pacific.

05 November, 2020

Singapore Airlines (SIA) has been in the limelight the last few months as it has quickly burned through over 70 per cent of the S$8.8 billion raised from the rights issue completed in June and cut 20 per cent of positions at the group’s airline subsidiaries.

SIA will again be in the headlines at the end of this week, when it announces fiscal second quarter results.
When including anticipated one-off charges related to redundancy costs and fleet impairment, the net loss for the quarter ending Sept 30 could again exceed S$1 billion.

The SIA Group incurred a S$1.123 billion loss for the June quarter and a S$732 million loss for the March quarter.

However, SIA is not at risk of running out of cash anytime soon as it has raised more liquidity than any airline group in Asia Pacific.

The quick rate it has gone through the S$8.8 billion raised from the rights issue has raised eyebrows but only around 20 per cent has been needed to cover operating expenses and S$8.8 billion represents a fraction of the capital SIA has the ability to actually raise.

SIA has already raised another S$2.1 billion through loans by leveraging unencumbered aircraft, has the flexibility to raise S$6.2 billion through mandatory convertible bonds and has S$1.9 billion in available credit lines.

SIA is also now looking at using more unencumbered aircraft — aircraft that are owned rather than leased and aircraft that don’t already have loans against them — to secure another several billion Singapore dollars worth of loans.

There is virtually zero risk of a collapse at SIA. The same cannot be said for other airline groups in Southeast Asia, many of which have not yet raised liquidity or have only raised small amounts and are now running on fumes.

Airlines throughout the world are struggling to stay afloat but the situation is particularly dire in Southeast Asia – with the exception of Singapore – due to a lack of government support for aviation and challenging market conditions that predate Covid-19.

It is easy to assume Singapore is more impacted than other Southeast Asian countries as it lacks a domestic market. 

However, in most Southeast Asian countries, domestic services are only generating sufficient revenues to cover variable costs, making it impossible for airlines to cover fixed costs and therefore resume paying for such items as aircraft leases.

Airlines in other regions have generally resumed at least partial payments following an earlier period of payment deferrals.

In Southeast Asia, SIA has been an exception, opting against payment deferrals as it was able to raise the cash to continue paying bills and avoid the high interest rates typically associated with payment deferrals.
However, there is now a risk that being a good payer will turn into a competitive disadvantage.

Several of SIA’s regional competitors are seeking huge reductions in payments and are warning suppliers that they will collapse if forced to resume full payments.

Several airlines in Southeast Asia are trying to renegotiate monthly aircraft rental reductions of up to 75 per cent in addition to not covering any of the missed payments since the crisis began.

SIA will not be able to achieve a similar reduction as it does not have the bargaining power of a distressed company on the verge of collapse.

Essentially, suppliers are relying on SIA — and airline groups outside Southeast Asia that have similarly been bailed out or recapitalised — to cover their own bills. 

As all airlines have the same suppliers, SIA’s continued payments in the last few months have indirectly subsidised other airlines in the region that have not been paying.

This indirect subsidy could continue for years, creating an unlevel playing field in Southeast Asia.

Given a choice, suppliers would reject these reduction requests from distressed airlines but doing so could trigger bankruptcy and lead to court supervised restructurings that would have a similar impact.

Two Southeast Asian airline groups, Thailand's Thai Airways and Nok Air, have already opted for court supervised bankruptcy rehabilitation.

More airline bankruptcy court cases are likely although so far most Southeast Asian airlines are trying to pursue out of court restructurings, hoping to achieve major cost reductions and return aircraft early to leasing companies on a voluntary basis.

Several airline groups also have creative alternatives for pressing the reset button without having to go through bankruptcy.

For example, Lion Group has started the process of creating a new airline in Indonesia that would replace at least one and potentially all three of its Indonesian airline subsidiaries – Lion Air, Batik Air and Wings Air — if ongoing efforts to renegotiate leasing contracts are unsuccessful.

Malaysia Airlines has similarly created a Plan B that involves shutting down Malaysia Airlines Berhad and restarting the flag carrier using the operating certificate of regional subsidiary Firefly should renegotiation efforts fail.

One way or another, most of SIA’s regional competitors will reset, enabling them to shed aircraft they no longer want and slash their costs.

SIA will also restructure by phasing out some older aircraft, deferring new aircraft deliveries and renegotiating supplier contracts.

However, the reset option is not available to SIA and it will not be able to phase out newer aircraft, cancel aircraft orders and achieve the same level of cost reductions.

For example, SIA will have to keep three long haul aircraft types — Airbus A380s, Boeing 777s and Airbus A350s — although streamlining the fleet would be ideal.

In comparison, as part of an out-of-court restructuring plan, Philippine Airlines is planning to reduce from two to one long haul aircraft type – by keeping 777s and returning A350s although they are only about two years old.

Malaysia Airlines is planning to phase out A380s as part of its out of court restructuring and Thai Airways will likely phase out A380s under its court supervised restructuring.

Several airline groups in Southeast Asia including AirAsia have also been able to stop taking delivery of new aircraft since the start of the pandemic while SIA has continued to honour its commitments and is taking delivery of several aircraft in the current December quarter, exacerbating its excess aircraft situation.

There will of course be opportunities for SIA as its competitors in the region restructure. For example, the routes that AirAsia, Philippine Airlines, Malaysia Airlines and Thai Airways drop as they shed aircraft will leave a void which SIA can partially fill.

SIA would also benefit from any airline collapses in the region, which is inevitable although most should be able to survive by restructuring out of court or through the bankruptcy process.

However, SIA will likely not have the appetite to pursue new airline investment opportunities outside Singapore.

SIA invested last decade in airlines in Australia, India and Thailand as part of a diversification strategy that had at best mixed results.

Meanwhile, several airline start-up projects have emerged and these new airlines have the ability to start from a clean sheet of paper and take advantage of cheap aircraft that are now available, along with crew made redundant by other airlines.

Start-ups will therefore have a potential cost advantage over SIA — similar to the advantage that will be enjoyed by existing airlines that are able to successfully reset with much cheaper aircraft.

In hindsight, SIA perhaps could have opted to press the reset button rather than pursue a massive bailout package backed by Temasek Holdings.

However, at the time, the decision to recapitalise SIA rather than declare or threaten bankruptcy was sensible.

SIA and the Government reacted quickly in March to protect Singapore’s status as an aviation hub, which is a crucial component of the overall economy.

Bankruptcy would have been risky although it could have led to a hard reset that regional competitors are now achieving.

Brendan Sobie is the founder of Singapore-based independent aviation consulting and analysis firm Sobie Aviation. He was previously chief analyst for Capa—Centre for Aviation.

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