News analysis

Turbulence in the air, but only a matter of time before SIA flies high again

Bailout, financial assistance, shareholder support.

Whatever one may call it, the $15 billion cash which is now accessible to Singapore Airlines (SIA) is a valuable lifeline that comes at a time when the carrier group is facing an unprecedented, existential threat.

Yes, it is a sad and unfortunate place to be in for the most admired and awarded airline in the world. And through no fault of its own.

As I pointed out in my earlier article about a week ago, SIA typically generates between $4.1 billion and $4.4 billion in revenue per quarter. During its October to December financial third quarter, it generated $4.5 billion in revenue and had an operating cost of $3.4 billion, excluding borrowing and leasing cost of $191 million.

Revenue has now virtually come to a standstill, with 96 per cent of SIA's fleet grounded.

As of this week, the company had a monthly cash burn of between $900 million and $1 billion. Some 70 per cent of its costs are fixed and variable costs which are unlikely to decline at a faster rate than revenue.

Come end-June, SIA also has a $500 million bond to redeem.

And going into the new financial year on April 1, the group will incur fuel hedging losses of US$1 billion (S$1.4 billion) if the price of fuel remains depressed at around US$30 per barrel.

This comes at a time when all its markets have been shuttered, forcing it to ground virtually its entire fleet. Staff have been furloughed or forced to take steep pay cuts.

Indeed, the $5.3 billion being raised in new equity and up to $9.7 billion via a 10-year mandatory convertible bond (MCB) rights issue give the firm a much needed financial lifeline, shoring up its cash flow and enabling it to meet its ongoing financial obligations.

Under the scheme, up to 1.77 billion new shares at $3 per share will be issued on the basis of three rights shares for every two existing shares held by shareholders. This represents a theoretical ex-rights price of $4.40.


Another $3.5 billion will be raised via the MCBs on the basis of 295 rights MCBs per 100 SIA shares currently held. This means every 1,000 shares will get 2,950 rights MCBs.

The company has an option to raise another $6.2 billion later.

The rights MCBs, while carrying zero coupon, will be issued in denominations of $1 each. It will be converted into shares at maturity in 10 years based on a conversion price of $4.84 per share.

But SIA can redeem the bonds semi-annually, paying 4 per cent per annum during the first four years, 5 per cent during the next three years and 6 per cent during the final three years.

It is a Catch-22 situation for shareholders.

While the new shares are priced at less than half the current price of SIA shares, at an ex-rights price of $4.40, shareholders are staring at a 30 per cent diminution in the value of their stock compared with the current price. As for the MCBs, shareholders are essentially lending money to SIA for free.

Also, given the circumstances, SIA is likely to suspend dividend payment for a while.

So should you subscribe?

If you believe SIA will recover and ultimately dominate the skies again - and there is no reason to believe it won't - you should subscribe to the shares and MCBs.

If you don't, your holding costs will be significantly higher. Your holdings will also be massively diluted. If you sell your stock now, you will realise a financial loss.

For SIA itself, the $15 billion will tide the company through the next 12 to 18 months, giving it time to recover and regain market share.

SIA is an iconic brand. It is a well-managed company led by competent professionals. It commands confidence and respect in the market. And it is solidly supported by one of the most reputable funds in the world - Temasek.

Long-term travel trends will not change because of the pandemic.

Air travel will remain the lifeblood of commerce and connectivity. Singapore will remain a key Asia-Pacific travel, financial, technology and supply chain hub. And SIA will continue to dominate this hub.

Also, this financial injection will enable SIA to be first off the block at a time when all its other regional competitors are also distressed. As a result, it could gain huge market share and stamp its market dominance - even grow its global footprint.

But the journey is not going to be without turbulence.

The company is locked into oil hedges that are significantly above current market prices (though it can potentially buy into lower-cost long-term contracts now).

There are huge capital expenditures ahead as the airline seeks to upgrade its ageing fleet.

Many markets will take three to six months to fully open (China is currently allowing only one flight per carrier per week).

Labour costs have to be managed.


The question is whether the firm commands enough goodwill with the ranks of its unions to ensure that sense and sensibility prevails.

Founding Prime Minister Lee Kuan Yew had to intervene when labour management relations hit the rocks after the severe acute respiratory syndrome crisis in 2003. There is no Mr Lee around any more.

Still, many market experts and insiders believe this is a company poised for better days ahead. If that is the case, this financial package - painful as it may be for shareholders now - will pay off nicely come three years down the road. All that is needed is some patience.

A version of this article appeared in the print edition of The Straits Times on March 28, 2020, with the headline 'Turbulence in the air, but only a matter of time before SIA flies high again'. Subscribe