SINGAPORE – Covid-19’s grounding of airlines worldwide has ensured that only the fittest and best-supported fliers will survive. With rich government backing, Singapore Airlines (SIA) Group is well-positioned to ride out the turbulence and boost its post-pandemic global market share.
Singapore is now estimated to have the world’s largest number of idle aircraft after global travel restrictions forced SIA to ground 96% of its approximately 200-plane fleet on March 23. With infections sharply rising in the city-state and elsewhere, it is unclear when normal operations will resume.
State investment company Temasek Holdings, which owns 55% of the airline, announced on March 27 a mammoth US$13.27 billion funding package for the national carrier, which is consistently ranked among the world’s best airlines and viewed as integral to maintaining Singapore’s position as an Asian travel and business hub.
The sheer size of the bailout suggests that the road to recovery will be long and difficult. Brendan Sobie, veteran aviation analyst and founder of Singapore-based consulting firm Sobie Aviation, nevertheless sees the rescue package as putting SIA “in a very strong long-term position relative to the overall Asian airline industry.”
Asia is projected to be the hardest-hit by falling airline passenger revenues, according to the International Air Transport Association (IATA), which recently forecast the region will suffer a $113 billion loss in 2020. IATA, which represents some 290 airlines comprising 82% of global air traffic, expects a $314 billion drop in total world carrier earnings this year.
The livelihoods of around 65.5 million people are dependent on the aviation industry, including those in sectors such as travel and tourism, according to IATA’s research, which calculates that 25 million aviation jobs are endangered across the world, including 11.2 million positions in the Asia-Pacific, as the world economy heads for a deep recession.
Asian carriers might see state assistance packages like Singapore’s as their only way of staying airborne through the downturn. SIA intends to raise $10.5 billion in equity through issuing 10-year mandatory convertible bonds and new shares to its shareholders at a deep 54% discount.
DBS Bank, Singapore’s largest bank, will provide the carrier a supplementary $2.8 billion bridge loan.
“Other countries in Asia may now be pressured to come up with [rescue] packages like what we have seen in Singapore and in other countries like the United States. However, not all governments and government-linked investment companies will be able to offer – or have the willingness to offer – this level of support to its airlines,” said Sobie.
Though SIA’s pilots have been placed on compulsory unpaid leave for up to seven days a month since April 1, with around 10,000 of the group’s more than 26,500 employees impacted by cost-cutting measures, Singapore has introduced a 75% wage offset as part of relief measures for employees of aviation companies, as well as hotels and tourism.
The city-state’s wage subsidy scheme “should enable the SIA Group, Jetstar Asia and other types of companies in Singapore’s aviation industry – handling companies, catering companies, etcetera – to maintain headcount, ensuring flying can quickly recover to pre-crisis levels when demand returns,” Sobie told Asia Times.
“SIA may be able to take advantage of opportunities that arise from this crisis by acquiring other airlines and accelerating expansion. Singapore could emerge as an even stronger hub, helping justify the massive investments in additional capacity at Changi Airport,” which seeks to raise its total capacity to 90 million passengers per year by 2024, he added.
At present, Changi International Airport has a total annual handling capacity of 85 million passengers. A record 68.3 million passengers passed through the transport hub in 2019.
As of early April, the number of flights fell 80% globally compared to 2019, according to IATA. With demand for international air travel at an unparalleled low, grounded airlines risk falling into the red as they burn cash to meet their operating expenses and recurring costs as they wait for a recovery, which some project could begin in the third quarter.
“We’re going to see a lot of consolidation in the industry. A lot of the airlines that were not as well-capitalized, that took on a lot of debt and bought back shares, we’re going to see those airlines either getting bailouts or you might even see them go under,” said Matthew Driskill, editor of civil aviation magazine Asian Aviation.
To survive the collapse in passenger demand, some have opted to moving cargo in the interim, carrying small parcels and medical equipment.
“A lot of passenger airlines, including low-cost carriers in Asia, are turning their single-aisle passenger planes into cargo planes,” said Driskill. “We still need to move cargo around the world.”
With the industry’s outlook growing darker by the day and carriers sourcing new lines of credit to stay afloat, state support will become more vital the longer global travel restrictions remain in place. In a report published on March 20, rating agency Moody’s noted the potential for airlines to collapse absent support from shareholders and/or central governments.
“Carriers that are able to rely on state-backed funding packages are likely to be able to ride out the storm with balance sheets being shored up enough to suggest short-term cash flow issues are largely de-risked,” said Mark Pacitti, founder and managing director at investment firm Woozle Research.
“However, in the medium-term, there is likely to be strings attached including limits on free cash flow decisions, higher costs of capital, and more oversight on spending decisions which still represent mid-term risks for investors,” he added. “For many carriers that rely on private funding, their near-term prospects look much more bleak.”
As expectations rise that governments will step in to offer relief packages, state support for their respective aviation sectors is likely to vary significantly from country to country with some governments taking new stakes in airlines or increasing existing stakes, Sobie predicts.
While hoping for the best, airlines and governments need to be prepared the worse, he added. “That means building up liquidity and securing government support to ensure survival. This is not necessarily about the survival of the fittest airlines, but about which governments will follow the likes of Singapore in supporting their airlines,” said Sobie.
One disadvantage facing the SIA Group’s fleet, which includes full-service carrier SilkAir and low-cost airline Scoot, is that it is a fully international carrier since there is no domestic market for air travel within the wealthy city-state.
International aviation markets hobbled by sweeping travel curbs are likely to have a slower rate of recovery than domestic markets, analysts say.
“The whole world isn’t just going to open up its borders all at once,” Driskill told Asia Times. “Because every flight they fly is an international flight, it’s going to take Singapore Airlines a bit longer to get back up to speed, because international routes will be the slowest to rebound.”
Whether or not a partial aviation recovery occurs in the second half of this year depends on the success of Covid-19 containment policies and the duration of travel restrictions. Despite being seen as better-positioned to wait for an international aviation recovery, analysts say SIA is could be headed for its first fiscal year loss in history.
The iconic flag carrier has been profitable since its founding in 1972. But given the depth and breadth of the virus-caused downturn, SIA’s 2020-21 financial year, which began on April 1, is likely to see the industry bellwether make a loss.
“Even without the hedge loss there may be an operating loss as we are looking at a long road ahead for full recovery,” said Sobie.
“What we don’t know is what shape the recovery curve will take once international travel starts to resume,” he added. “The market may fully recover fast – with pent up demand perhaps even leading to higher demand than pre-crisis – or the curve could be a gradual incline and take years to reach pre-crisis level.”