Tuesday, March 24, 2020

SIA will need government aid to survive impact of Covid-19, say analysts

By Janice Lim

24 March, 2020

SINGAPORE — Singapore Airlines (SIA) will need a financial boost from the Government, said analysts, who noted that the same applied to airlines across the globe as the Covid-19 outbreak continues to wreak havoc in the aviation sector.

Demand for international air travel has been obliterated as governments close their borders, but there will be costs that SIA will still be incurring even though it has grounded almost all its flights, they noted.

On Monday (March 23), the national carrier said that it will cut 96 per cent of the capacity that had been originally scheduled up to the end of April, as border controls tighten worldwide due to the Covid-19 outbreak.

Later on Monday, SIA announced cost-cutting measures affecting about 10,000 staff including voluntary and compulsory no-pay leave, furloughs, and further pay cuts to senior management staff members. The airline did not place an estimated value on the cuts in a staff memo seen by TODAY.

The announcements came as SIA's share price sank 11 per cent on Monday to S$5.36, its lowest level in more than 15 years.

To help SIA through these difficult times, analysts expect the Government here to provide support in the form of a working capital loan or subsidies, but not to the extent of a bailout, as was suggested in a commentary in The Straits Times on Thursday.

According to SIA’s third quarter earnings report, the airline had a cash flow of S$1.57 billion in the quarter ending Dec 31.

In a report issued on Monday before the SIA announcements, UOB Kay Hian’s aviation analyst, Mr K Ajith, said that the carrier needed “backstop liquidity” of at least S$5 billion by June.

In an earlier report, he estimated that SIA’s revenue could decline by S$1 billion in the current fourth quarter ending March 31.

This latest move by SIA to ground almost all its flights would further hit their declining revenue.

Mr Brendan Sobie, independent analyst of Sobie Aviation, estimates that the revenue for passenger services, which accounts for their largest business segment, could decline by as much as the cut in capacity.

However, he pointed out that SIA also has other revenue streams such as those from transporting cargo.

[Right. That's what SIA is known for - transporting cargo.]

Analysts told TODAY that they are not able to estimate the extent to which SIA’s current cash and bank balance of S$1.57 billion could help the company through the crisis.

For one thing, SIA does not publicly disclose its daily burn rate, unlike other airlines, pointed out Mr Sobie. The burn rate is the cash used just to keep operating regardless of income.

CIMB economist Song Seng Wun also said it’s hard to estimate how much operating costs would be going down since almost all of its flights are grounded.

“How much manpower you need to preserve is a guesstimate. And you cannot tie that to how much they have spent before. Nobody has grounded almost an entire fleet before… How many employees to retain, these are variables that will play a role in burning through that cash,” he said.

While revenue growth has slumped, analysts pointed out that SIA, like other airlines, still has recurring costs.

As airlines are heavily asset-based companies, a lot of their operating costs are fixed, said Mr Sobie.

They have to continue financing aircraft that they have leased or rented.

Other costs such as maintaining the aircraft, reserving their place on a flight route with a particular timing, as well as keeping pilots up to date as they continue to fly using the simulator, also adds to their costs, said independent aviation analyst Priveen Raj Naidu.

While fuel costs have gone down due to the drop in oil prices, there are still fuel-related costs as SIA hedged fuel when oil was at a higher price. Hedging is a process of locking in prices for the longer term to guard against rises. In fact, oil prices have crashed.

“Payments come in every month regardless if you fly or not,” said Mr Sobie.

Globally, several other airlines have publicly stated that they are at risk of losing millions due to the Covid-19 outbreak. Franco-Dutch airline Air France-KLM US$215 million of their earnings could be wiped out between February and April, while Australian carrier Qantas warned that it could lose up to US$99 million in net profit in their 2020 earnings.

Others, such as German national airline Lufthansa and several other American airlines, are asking for aid for their governments.

“It is a global nightmare for the aviation industry. A lot of airlines, their existence are being threatened,” said Mr Song.

Mr Priveen said: “Let us not forget like medical workers and other front liners, cabin crew, pilots and support staff have played a huge role in bringing our Singaporeans home”.

Commentary: The world’s airlines are headed for a crash landing. Government parachutes need to be activated now

The economic damage to the aviation industry from COVID-19 is expected to extend to every aspect of the global economy, says IATA chief Alexandre de Juniac.

By Alexandre de Juniac

24 Mar 2020

MONTREAL: Someone once said that history doesn’t repeat, but it rhymes. Today, as the world’s airlines face a cataclysm caused by the COVID-19 pandemic, memories of the post-9/11 period come to mind.

But this crisis is far worse. Within a period of a few weeks, airlines have seen passenger demand completely collapse.


For most carriers the market for air travel is actually below zero — the number of people cancelling flights exceeds the number of new bookings. That is not surprising, given that more than 100 governments have closed their borders to foreign visitors and/or imposed lengthy quarantines that have the same practical effect.

As airlines’ ticket sales disappear, so does the daily cash intake from those sales, which even the most well-capitalised airlines need to pay their bills.

Unfortunately, the bills haven’t gone away, although the revenue to pay them has. Airlines are doing everything they can to slow the steady outflow of cash.

They are grounding hundreds of aircraft, eliminating services and in some cases imposing salary reductions and furloughing employees. In desperation, some are hoping to outlast the crisis by shutting down entirely.


The economic damage to the industry, its employees and its supplier base, is immense; and because aviation does not exist in a vacuum the harm will extend into virtually every corner of our globally connected economy.

The fact is that the modern world is built on aviation connectivity. Aviation supports US$2.7 trillion in economic activity, equivalent to 3.6 per cent of global GDP.

Furthermore, the world’s airlines employ some 2.7 million people. Each one of these 2.7 million dedicated individuals helps to create another 24 jobs in the air transport- and tourism-related industries, such as jobs in hotels, and restaurants, theme parks and museums.

That works out to 65.5 million jobs around the globe that are connected to airlines.

Time is fast running out for governments to step in to help. IATA has estimated that the typical airline had just two months of cash at the start of the year and the latest available figures suggest that global air passenger numbers for March are down 50 per cent from a year ago.

Support measures are urgently needed. On a global basis, our initial estimate is that emergency aid of up to US$200 billion is required. This should include things such as direct financial support to compensate for reduced ticket revenue that is directly attributable to travel restrictions.

Government or central bank-backed loans and/or loan guarantees will also help, as will temporary tax relief and rebates on taxes paid this year. In combination, these measures will provide airlines with critical breathing space until the crisis recedes.

And where restrictions on entry/exit and quarantines make air services untenable, it is appropriate that governments should suspend consumer regulations that make airlines financially liable for cancellations and schedule changes.

I call aviation the business of freedom, because it liberates us from the constraints of time, distance and geography and creates opportunities for greater understanding among cultures.

Even today, in its weakened state, it is aviation that is transporting doctors, nurses and much-needed medicine and testing kits, into the areas hit hardest by COVID-19. When it needs to get there fast, it goes by air.

The window for firm government action is closing. An industry whose raison d'être’ is connecting people, cultures and commerce cannot long survive under today’s conditions. And the world will be a much poorer place for it.

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