Shares of Singapore Airlines (SIA) this past week received a booster shot given the positive news concerning the aviation industry. The stock closed 14% higher at $3.91 on Nov 10 from the previous day’s close. It climbed further to end at $$3.92 on Nov 11, though it is still down 38.5% year to date.

For one, air travel is slowly resuming. On Nov 11, Singapore announced it will begin air travel bubble flights with Hong Kong on Nov 22. There will be one flight a day into each city with a quota of 200 travellers per flight. This will be increased to two flights a day into each city with a quota of 200 travellers per flight from Dec 7. Of course, travellers must meet the eligibility criteria and adhere to the prevailing border control measures and public health requirements of both cities.

Apart from flights to and from Hong Kong, Singapore has established reciprocal green lane arrangements for essential travel to several countries over the past few months. They are China, Malaysia, Brunei, Korea, Japan and Indonesia. It has also established unilateral border opening for non-essential travel from China, Australia, Vietnam, New Zealand and Brunei. As at Oct 29, Singapore has received 602 visitors from the latter five countries, according to the Civil Aviation Authority of Singapore.

That aside, Pfizer announced it had jointly developed an experimental Covid-19 vaccine with BioNTech of Germany that is over 90% effective in eliminating the virus. The mass production and delivery of such a vaccine could persuade countries to ease travel restrictions and open their borders in a big way. It would also bolster the confidence of travellers to fly again.

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SIA says it welcomes the announcement of the air travel bubble between Singapore and Hong Kong. “[This] arrangement is an important step for both [cities] as we rebuild from the impact of the Covid-19 pandemic and supports the ongoing recovery of the airline industry. It paves the way for us to open up in a safe and calibrated way with the necessary testing protocols in place and provides a promising model for other bilateral arrangements around the world,” the airline says in a Nov 11 statement.

The company says it is encouraged by the development of Pfizer’s Covid-19 vaccine. “[SIA] welcomes and supports all efforts to develop safe and effective testing protocols and vaccines. Their success will help to accelerate the reopening of international borders, support the return of demand for air travel and aid in the recovery of the airline industry,” an SIA spokesperson tells The Edge Singapore.

Still cautious

Despite these positive developments, SIA CEO Goh Choon Phong prefers to take a cautious stance, given that there is still plenty of uncertainty. Just days before Pfizer’s vaccine announcement, SIA had posted a weak set of results for 1HFY2021 ended Sept 30. The national flag carrier swung into the red with a net loss of $3.47 billion during the half-year period as revenue plunged 80.4% y-o-y to $1.63 billion.

Goh warns that the resurgence of Covid-19 through subsequent waves of infections — which is happening elsewhere — could devastate air travel again, especially when the successful production and delivery of an effective vaccine has yet to materialise. He points out that SIA’s operations and cash flow will be impacted in such a scenario.

SIA has only projected to hit just 16% of pre-Covid-19 capacity by December versus 13% currently. This is expected to rise to 50% by end2021. “The market is very dynamic at the moment,” Goh said in an analyst and media joint briefing on Nov 9.

Goh’s cautious stance may have also included its underperforming 77.65%-owned subsidiary SIA Engineering Co. The latter could continue to be a drag on SIA, according to analysts. Already, SIA Engineering had swung into a loss of $19 million in 1HFY2021 ended Sept 30 from earnings of $87.6 million a year ago. Its revenue tumbled 56.5% y-o-y to $223 million.

UOB KayHian forecasts losses for SIA Engineering to widen to $36.9 million in FY2021 from $7 million in FY2020. This is to factor in the company’s impairment loss in the half-year period. The brokerage has also lowered its FY2022 earnings forecast for SIA Engineering by $67 million after accounting for lower earnings from associates and a slower rate of recovery. “We are now less convinced of [the company’s] ability to make a turnaround post-Covid-19,” UOB KayHian analyst K Ajith writes in a Nov 5 report.

All is not lost for SIA though. The company has ample liquidity to weather the downturn in the foreseeable future. It currently has an unutilised sum of $2.6 billion from the $8.8 billion gross proceeds raised from a rights issue undertaken earlier this year. SIA has also raised a total of $2.1 billion via loans secured on its aircraft and a short-term unsecured loan. Furthermore, the company has about $1.9 billion lines of credit available for drawing and up to an additional $6.2 billion of mandatory convertible bonds (MCBs) to be issued if the crisis drags on.

It helps that SIA’s cash burn rate is declining too. Stephen Barnes, SIA’s senior vice-president of finance, points out that the company’s cash burn was about $350 million in May, June and July respectively. That has reduced to about $300 million and below now, he says.

According to Barnes, SIA has yet to decide on whether to tap liquidity from the issuance of the additional MCBs. But he notes that a decision could be made by the end of March next year, at the company’s financial year-end.

SIA has also been successful in postponing orders of new planes, which will help ease spending. Goh says the company’s outstanding Airbus aircraft on order have been deferred, while negotiations with Boeing are coming to a conclusion.

Mixed reactions from analysts

So, what should investors do? UOB KayHian believes SIA is doing “all the right things” to reduce cash burn and bolster its liquidity. While the operating environment is highly uncertain, the brokerage reckons the risks at this stage are equally weighted to the upside and downside. Nevertheless, it notes that news of an effective vaccine by this year-end would aid “confidence” in the stock.

This, UOB KayHian says, would lead to advance bookings and boost SIA’s chances to raise funds. The brokerage believes that the SIA brand still commands tremendous brand loyalty, which could lead to strong pricing power when demand eventually returns.

“As such, we maintain ‘buy’ but with the caveat that effective vaccines are manufactured by this year-end,” says UOB KayHian’s Ajith, who has an unchanged target price of $3.75. “We have also assumed SIA would issue $6.2 billion in MCBs by March [next year].”

However, CGS-CIMB Research is less than positive. The research hosue reckons it is “highly unlikely” for SIA’s capacity to hit its forecast of 45% in FY2022 even if SIA sees a strong pick-up in passenger airline capacity deployments from January to March next year. This compares to SIA’s average capacity forecast of 33% throughout the year. “Given the uncertainties brought about by the global pandemic, it is not possible to say if SIA is too conservative, or if we are too bullish,” CGS-CIMB analyst Raymond Yap writes in a note dated Nov 9.

Nevertheless, CGS-CIMB believes SIA’s bottom line may be less negatively impacted going forward. The brokerage notes that the company is less likely to transfer accumulated unrealised mark-to-market (MTM) fuel derivative losses from the balance sheet to the P&L. This is because the derivatives, which are more than SIA’s actual fuel requirements, will no longer qualify them as effective fuel hedges, it says. “This is a positive for future earnings announcements,” says Yap.

On the other hand, if SIA’s capacity recovery assumptions are realised, CGS-CIMB says its FY2022 earnings estimates and beyond may have to be revised lower. “For now, we have kept our assumptions unchanged as the situation is still developing and a Covid-19 vaccine, once available, may be able to change the realities for the aviation industry slowly, but surely,” says Yap, who is keeping his “hold” rating with an unchanged target price of $3.46.