Commentary

SIA faces hard choices, sooner rather than later

If you operate an aircraft whose wheels are over foreign territory within 14 seconds of leaving your home airport, your survival is likely to depend on open and unfettered access to global markets.

Alas, that is the fate of Singapore Airlines (SIA).

The Covid-19 pandemic has been a perfect storm for an airline so highly dependent on open borders and demand for air travel.

With borders closed, countries going into lockdowns and travellers hunkered down at home, the airline group's passenger carriage has plunged by 99.5 per cent.

The SIA group carried just 38,000 passengers in the three months to June 30, compared with 9.4 million a year earlier.

Although its cargo side saw an improvement due to strong demand for movement of personal protective equipment, pharmaceuticals and fresh foods, revenue declined by $3.25 billion or 79 per cent year on year to $851 million during the quarter.

That led to an unprecedented loss of $1.1 billion for its first quarter, compared with a profit of $111 million a year earlier. So much for the financial numbers.

The good news is that the April-June quarter is likely to have been its worst. But the bad news is that things are unlikely to improve significantly any time soon - at least not until a reliable vaccine is found and widely deployed.

The International Air Transport Association - citing poor virus containment around the world, depressed business travel and lack of consumer confidence - does not expect air travel to return to pre-Covid-19 levels any time before 2024.

In the meantime, it projects global airlines will collectively lose around US$84.3 billion (S$115.5 billion) this year and a further US$15.8 billion next year.


Pre-pandemic, Singapore Airlines' planes flew to 136 destinations. Today, almost 150 of its
planes are parked at Changi Airport and Alice Springs in Australia. Almost 80 per cent of its
pilots and cabin crew are grounded. It now flies to just 39 destinations. PHOTO: BLOOMBERG

The SIA group - comprising SIA, SilkAir and Scoot - has around 220 planes, 3,273 pilots and 10,932 cabin crew.

The total number of employees at the SIA group is about 28,000.

 
 
 
 

Pre-pandemic, SIA's planes flew to 136 destinations. During the height of the pandemic in April, these planes flew to 15 destinations, largely to repatriate returning Singaporeans.

Today, almost 150 of its planes are parked at Changi Airport and Alice Springs in Australia. Almost 80 per cent of its pilots and cabin crew are grounded. The airline now flies to just 39 destinations.

By October, even after a slight recovery, it will operate at just 8 per cent of passenger capacity.

The company has managed to make it this far this year because of the Government's generous wage support scheme and a massive fund-raiser it carried out recently.

The SIA group has raised $11 billion via rights issues and secured loans.

It has also tied up additional credit lines, and can raise a further $6.2 billion in mandatory convertible bonds by July next year.

This is the largest amount raised by any Asian carrier group.

This money serves two purposes.

First, it provides much-needed liquidity to get through the cash burn during a time when revenue has largely dried up.

Second, it enables SIA to be in a strong enough position to be among the leaders when the industry eventually recovers.

Failing on these two fronts means failing its shareholders who stumped up the money for its rights issue and its employees, who are sacrificing so much to help the company get through this crisis.

On the staff side, the company has announced significant wage cuts, offered no-pay leave, arranged temporary redeployment to other industries and rolled out early retirement for pilots and cabin crew.

 
 

About 6,000 of its staff are still on no-pay leave, with 1,700 redeployed in external organisations.

Sobie Aviation analyst Brendan Sobie calculates that the company has obtained around $40 million a month from the Government's Jobs Support Scheme. The Government has just announced an extension of a 50 per cent wage support for the aviation sector until end-March next year.

But the brutal fact is, given the medium-term prognosis for the industry, this may not be enough.

Global aviation is unlikely to recover to previous levels for the next three years. Even if a vaccine is found, it will take time to be deployed in many markets.

Meanwhile, some travel habits may have changed, especially on the corporate front where technology has shown that a significant portion of business travel can be cut down.

Yes, "travel bubbles" and special "green lanes" will develop and grow. But will they grow fast enough to enable SIA to sustain the scale of resources that it has in place right now? Not likely.

The bottom line is that SIA will have to rescale too.

Not scale down as a premium carrier but, rather,"right-size" for a market it will face for the next few years.

As Mr Sobie points out, SIA will have to be much smaller than it is now, adding: "It will have to fly smaller aircraft, on a smaller network, with a smaller fleet."

Indeed, a significant number of older and bigger planes like the A-380 and B-777 will have to be mothballed.

The leased A-330s are already returning to Airbus, while the older B777-200s are being retired.

 

Its fleet will have to comprise the more efficient and newer planes like the B-787 and A-350, while also taking in the narrow-body B-737s from SilkAir next year when the regional carrier is merged into the parent airline.

As for staff, even after all the measures now in place, there will be surplus manpower if the market does not return to pre-Covid-19 levels soon. And the market is unlikely to revert to pre-2020 levels any time soon.

Meanwhile, the Government's wage support scheme will wind down this month.

The Changi Air Hub employs 190,000 people and accounts for 5 per cent of Singapore's gross domestic product. And SIA accounts for half of Changi's traffic.

Being so critical to Singapore's economy, it is no surprise that the Government has thrown so much support behind both.

Scaling down is a very difficult proposition with grave consequences for SIA if not done properly.

Cut back too much and the carrier will be in danger of losing its global premium branding. This is a multiple-award-winning and world-beating airline known for its latest and most efficient planes, wonderfully appointed cabins and the best pilots and crew in the world.

Don't do anything, and the group will be in dire financial straits by 2023.

But SIA has to face stark new realities.

 

A new reality where utilisation of capacity could remain well under 50 per cent for the next three years.

A new reality where costs will have to be managed against new market conditions.

A new reality where premium travel - which accounts for 40 per cent of income - may not come back any time before 2024 and, when it does, it might not be as big as it was before.

A new reality where airlines have to defend their finances just to survive.

A new reality where being operationally nimble and flexible will separate winners from losers.

There is no playbook for this.

This black swan event forces painful and unprecedented choices on the airline industry.

SIA's day of reckoning is drawing closer. Hard choices will have to be made, sooner rather than later.

A version of this article appeared in the print edition of The Straits Times on August 18, 2020, with the headline 'SIA faces hard choices, sooner rather than later'. Print Edition | Subscribe