Photo: Bloomberg

Despite clocking its worst ever results in its history so far, the market appears confident that national flag carrier Singapore Airlines (SIA) will weather through aviation’s greatest crisis.

On May 20 — the day after it released its financial statements for FY2021 ended March 31 — shares of SIA ended up 6 cents or 1.3% at $4.76. That extended the stock’s gain from its 2020 trough of $3.31 to 43.8%.

The stock, however, is down 16.8% from the year-to-date high of $5.72, exacerbated by the recent spike in Covid-19 cases in Singapore among other things.

During the year, SIA recorded its largest full-year net loss of $4.27 billion. This was the airline’s second full-year loss since its FY2020 net loss of $212 million, when Covid-19 erupted into a worldwide pandemic in the first quarter of last year.

SIA’s latest net loss was due to several reasons. For one, the airline’s total revenue plunged 76.1% y-o-y to $3.82 billion from $15.98 billion. This came on the back of a near total collapse in passenger traffic, owing to border closures aimed at halting successive waves of Covid-19 infections.

SIA’s mark-to-market losses on ineffective fuel hedges totalling $497 million were another reason. The airline recognised these items, following downward adjustments to the expected rate of capacity recovery and the corresponding fuel consumption. This was partially mitigated by a $283 million fair value gain on fuel hedges after a rise in fuel prices in the second half of FY2020. SIA says it had paused fuel hedging activity since March last year.

Several non-cash impairment charges were also to be blamed. In 2HFY2021, the airline deemed four 777-300ERs and eight 737-800NGs as surplus to fleet requirements. It made a further write-down on four of its A320s impaired in 1HFY2021 due to a reduction in their market values. The total impairment charge on 45 surplus aircraft during the year amounted to $1.73 billion.

SIA also registered an impairment of goodwill of $170 million. This item was recognised after a review was conducted on the impact of Covid-19 on business conditions in 1HFY2021. The goodwill was recorded when the airline first gained control of Tiger Airways in October 2014.

Finally, the airline included impairment charges on base maintenance assets from its maintenance, repair and overhaul subsidiary SIA Engineering (SIAEC). In 2HFY2021, the latter recognised a $2 million on this item with a $11 million impairment on an investment in an engine programme. Overall, the total impairment recorded by SIAEC was $48 million during the year.

Setbacks aside, SIA had some bright spots as the airline’s cargo revenue leapt 38.8% y-o-y to $2.71 billion. SIA says the loss of passenger aircraft bellyhold capacity was compensated by the additional cargo volume created by the removal of passenger seats, deployment of passenger aircraft for cargo-only flights and improvements in freighter utilisation.

Strong air cargo demand, especially in key segments such as e-commerce, pharmaceuticals and electronics, also provided strong support for both cargo load factors and yields amid tight industry cargo capacity, it adds.

SIA also kept its total expenditure down 60.2% y-o-y to $6.33 billion from $9.59 billion. Of this, net fuel cost plummeted 78.1% y-o-y to $1.02 billion, due to capacity cuts and lower fuel prices in 1HFY2021. Non-fuel expenditure more than halved to $5.1 billion on the back of capacity cuts, cost-saving initiatives, staff related measures and government support schemes.

The big question now is SIA’s performance ahead. Will the airline continue to be loss making in FY2022, or will it bounce back?

SIA reckons the outlook remains “uncertain” for the global airline industry, though mass vaccination exercises are in progress in most of its major markets. It warns that international air travel remains “severely constrained” and its recovery trajectory is still “unclear”.

Based on its current published schedules, SIA expects its passenger capacity to be around 28% of pre-Covid levels by June 2021. By the following month, the airline says its capacity is expected to reach around 32% of pre-Covid levels and serve around 49% of the points that were flown before the crisis.

However, cashflow should not be a worry for SIA in the immediate term. On the same day it released its FY2021 results, the airline announced that it will issue the second tranche of mandatory convertible bonds (MCBs) amounting to $6.2 billion. Entitled shareholders will be offered on a pro-rata basis the right to subscribe to 209 MCBs for every 100 existing shares that they hold on the record date, being May 28.

The terms of the second tranche of MCBs were approved by shareholders at SIA’s extraordinary general meeting on April 30 last year. They were subsequently renewed at its annual general meeting (AGM) on July 27.

SIA CEO Goh Choon Phong says the move last year to secure more liquidity, including the first tranche of MCBs and rights issue, was “prudent”. “That $15.4 billion [raised last year] is an injection of confidence that has enabled us to secure more financing in favourable terms,” he says at a media briefing on May 20.