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Why SIA will need to downsize to survive Covid-19

Singapore Airlines (SIA) recently reported a S$1.123 billion net loss in the quarter that ended in June but this was not unexpected given how the Covid-19 crisis has virtually crippled the aviation industry.

Why SIA will need to downsize to survive Covid-19

Job cuts are inevitable after the Jobs Support Scheme, which has provided SIA with roughly another S$400 million in government support, expire, says the author.

Singapore Airlines (SIA) recently reported a S$1.123 billion net loss in the quarter that ended in June but this was not unexpected given how the Covid-19 crisis has virtually crippled the aviation industry.  

The consensus among analysts is that SIA could incur a loss of over S$3 billion for the fiscal year ending March 2021. SIA is expected to remain in the red for the year ending March 2022 and will not return to profitability until the year ending March 2023 at the earliest.

SIA is fortunate to have strong government support to ensure its survival but it will emerge from the crisis a much different airline group.

In the first five months of the global pandemic the focus has been on bolstering liquidity and maintaining a skeleton schedule.

SIA has so far raised a whopping S$11 billion — more than any other Asian airline group — and can raise another S$6.2 billion through mandatory convertible bonds.

This gives SIA sufficient cash to survive even if passenger traffic remains at the current 1 per cent of pre-Covid levels for several months and if a full recovery takes several years.

So far, it has avoided job cuts thanks to Singapore’s generous wage credit scheme although salary reductions, ranging from 10 per cent for staff to 35 per cent for the chief executive, unpaid leave schemes and early retirement packages have been introduced.

Unfortunately, the steps taken so far are just the tip of the iceberg as SIA needs to prepare for a long crisis.

More than 6,000 employees have so far accepted unpaid leave, which was first introduced over five months ago, and SIA is also offering early release and retirement for cabin crew.

But these will not be sufficient given the length and depth of this crisis. 

Job cuts are inevitable after the Jobs Support Scheme, which has provided SIA with roughly another S$400 million in government support, expires.

The scheme could be extended, possibly on a limited wind down basis, for a couple of months more beyond the current Aug 31 expiration.

However, it is not realistic to provide subsidies for the two to four years it will take for SIA to return to its pre-Covid size.

Prior to the pandemic, staff costs accounted for around 18 per cent of SIA Group’s total expenditures and the average revenue per employee was around S$600,000. 

Without a reduction in the group’s head count, which stood at nearly 28,000 before Covid-19, revenue per employee will drop to less than S$200,000 in the current fiscal year, a clearly unviable figure without continued wage subsidies. 

SIA is working aggressively to cut other costs but most of its costs are fixed.

It will not be until at least 2023 when the SIA Group returns to its pre-Covid size of 38 million annual passengers, 137 passenger destinations and 201 in-service passenger aircraft (figures as of Dec 31, 2019).

REVIEWING FLEET SIZE

SIA is now conducting a major review of its fleet and network which will be completed by October.

The SIA Group, which includes budget airline Scoot and regional airline SilkAir, will be a tiny fraction of its normal size for the duration of the pandemic and will also be smaller in the initial years once the pandemic ends.

Demand, particularly for corporate travel, is expected to remain depressed for at least another year even after a Covid-19 vaccine is developed and approved.

The corporate segment is critical to SIA given its high reliance on business passengers and high concentration of premium seats.

SIA’s largest aircraft, the premium-heavy A380, may not return to service for a few years and half the fleet could be scrapped, resulting in a massive write down.

SIA has 19 A380s including five new 471-seat aircraft that were delivered in 2017 and 2018. Three A380s have been recently retrofitted while the other 11 aircraft still have an older product.

These were slated to be retrofitted over the next couple of years but SIA may now retire several early.

SIA will likely rely more on the Boeing 737s as they are smaller and have a lower portion of premium seats than the widebodies.

The group originally planned to retrofit all 737s with lie flat business seats. But SIA will now likely keep some 737s with recliner style business seats as leisure travel is expected to recover faster than business travel.

SIA initially announced in 2018 plans to absorb SilkAir, which operates the group’s 737 fleet, and this project should be accelerated given the efficiencies and cost savings it generates.

Scoot’s fleet of Airbus A320 narrowbody aircraft will also feature prominently as the group restructures.

Scoot’s low-cost model and all-economy product is well positioned given the expected relative strength of the leisure and short-haul segments over the next few years.

The SIA Group will have to take several new aircraft before the end of this year, including Airbus A321neos and Boeing 787-9s for Scoot as well as Airbus A350-900s and Boeing 787-10s for the parent airline.

While most aircraft that were slated to be delivered in 2021 or later can be deferred, it is very difficult to delay by more than a few months aircraft that have already been completed or are in the process of being produced.

Taking new aircraft will further strain the financial situation but SIA has the liquidity to manage this burden and eventually the group will need these aircraft.

Some of the new aircraft will initially be stored, joining 148 SIA Group aircraft that are now grounded.

Only 33 of the group’s aircraft are currently used for passenger flights. SIA Group is also using 32 of its passenger aircraft and all seven of its freighters for cargo flights.

SIA passenger traffic was down 99.6 per cent year-on-year in its first financial quarter ending June.

The group is now operating passenger flights to nearly 40 destinations compared to 137 prior to Covid and only about 15 during the peak of the crisis in April.

However, SIA is only operating 7 per cent of its pre-crisis passenger capacity due to very low frequencies. All but four destinations are currently served with three weekly flights or less.

Demand is very low as borders remain closed, resulting in extremely low load factors.

In the June quarter only one out of 10 seats were filled on average and belly cargo contributed more revenue than passengers on most flights.

For at least the next several months, a skeleton schedule will be provided as international travel remains heavily restricted.

For the next few years, SIA will likely fly fewer flights to fewer destinations with fewer aircraft.

The use of smaller aircraft will become common on routes within Asia as SIA responds to reduced demand, particularly in the corporate and premium segments.

SIA will not look like its normal self for several years. However, SIA will eventually return to its former glory.

The group has strong government support and a war chest of cash, ensuring a successful reactivation once it is ready to come out of hibernation.

 

 ABOUT THE AUTHOR:

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.

Related topics

Singapore Airlines aviation Changi Airport SIA air travel

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