Full Year Loss As Covid-19 Crippled Travel Demand In Fourth Quarter

GROUP FINANCIAL PERFORMANCE 

The Group entered the fourth quarter of FY19/20 on the back of a strong performance for the first nine months of the financial year, driven by robust passenger traffic numbers and the extensive initiatives undertaken as part of its Transformation Programme. However, the market conditions deteriorated abruptly in February 2020 as the Covid-19 outbreak started to spread globally. Fears about the spread of the virus, as well as global travel restrictions and border controls, led to a collapse in the demand for air travel during the quarter.

The Group responded decisively by implementing wide-ranging cost-cutting measures and capacity reduction, starting with Mainland China in early-February and eventually to the rest of the network by end-March. The steep drop in passenger traffic in the fourth quarter resulted in a drastic $894 million (-21.9%) decline in revenue compared to the corresponding quarter last year. The Group subsequently announced that the scheduled passenger capacity from April to June 2020 would be reduced by 96%.

Fuel prices plunged towards the end of the quarter as the demand for oil slumped due to the Covid-19 pandemic amid an unexpected price war and a consequent supply glut. This led to fuel hedging losses on contracts maturing during the quarter. Furthermore, the expected capacity cuts in FY20/21 will lead to lower fuel consumption than previously anticipated based on normal operating conditions, causing the Group to be in an over-hedged position. As a result, the Group had to record substantial mark-to-market losses of $710 million on these surplus hedges. Under financial reporting standards, these losses must be recognised in the FY19/20 Profit & Loss Account. The drop in revenue, and fuel hedging losses could not be compensated by the savings in non-fuel expenditure from capacity cuts, government support schemes, and other cost-cutting measures.

Consequently, the Group swung into an operating loss of $803 million for the quarter, a $1,056 million reversal from the profit of $253 million last year. Net loss for the Group was $732 million for the same period.

For the full year ended 31 March 2020, Group operating profit fell $1,008 million year-on-year to $59 million, as the deterioration in operating performance from January to March 2020 eroded the improvements made in the first nine months of the year. Group net loss was at $212 million for FY19/20, a reversal from the $683 million profit last year (-$895 million).

The Group financial performance is summarised as follows:

RESPONSE TO COVID-19

Against the backdrop of a collapse in air travel, we have proactively implemented measures to cut expenditure and conserve cash. These include management pay cuts, voluntary and compulsory no-pay leave schemes, and a shorter work month for all ground staff, while Board Directors have volunteered a reduction in their fees. We have worked with suppliers and partners to reduce cost and reschedule payments, and have deferred non-essential projects and imposed tight controls on discretionary spending.

The drastic cuts in passenger flight operations have significantly reduced overall cargo capacity. However, there has been strong demand from global supply chains for air freight, especially for the movement of critical medical supplies and essential goods. Beyond maximising freighter utilisation during this time, we have also deployed passenger aircraft on cargo-only missions, and secured regulatory approval to transport freight in passenger seats and overhead bins.

As aircraft payments make up a significant portion of our capital expenditure, we engaged the aircraft manufacturers early to negotiate adjustments to our delivery stream for existing aircraft orders and progress payments to reduce near term cash outflows. This will also help to moderate capacity growth in the near term, while we remain committed to our longer term fleet renewal programme.

We do not take the support and understanding of our customers for granted, and have taken steps to keep in touch and communicate with them regularly. We have also revised our global waiver policy to offer bonus flight credits or provide refunds to those who prefer that option, and extended the validity of our KrisFlyer and PPS statuses.

Even as we scaled back operations due to the border closures, the Group persisted with services to key cities for as long as possible to bring many of our customers home, including Singaporean students who were studying overseas.

We are also seeking to retain our talented and highly trained staff through this crisis. Their expertise and dedication will be crucial when the recovery comes.

We are proud that many of our staff members have volunteered to be ambassadors on the frontline in the fight against Covid-19 in Singapore. They perform important roles in the healthcare, transport and social service sectors, and their hard work, high service standards and attention to detail have epitomised the SIA spirit.

On 26 March 2020, the Group announced a Rights Issue through Rights Shares and Rights Mandatory Convertible Bonds to build liquidity and strengthen its balance sheet. The Rights Issue is expected to complete by June 2020 and will raise gross proceeds of approximately $8.8 billion. The Group also has the option of issuing up to an additional $6.2 billion through Additional Mandatory Convertible Bonds. This is intended to provide the Group with additional liquidity if this crisis prolongs, and would only be tapped if necessary.

We are concurrently exploring other sources of funding, including secured financing and sale-and-leaseback transactions. All of these will allow the Group to be in a position of strength and be able to capture future growth opportunities.

OUTLOOK

The prospects for a recovery in international air travel in the months ahead depend upon when border controls and travel restrictions ease. There is no visibility on the timing or trajectory of the recovery at this point, however, as there are few signs of an abatement in the Covid-19 pandemic. The Group will maintain a minimum flight connectivity within its network during this period, while ensuring the flexibility to scale up capacity if there is an uptick in demand.

In the meantime, the demand for essential goods such as medical supplies, pharmaceuticals and fresh foods still exceeds air freight capacity on many key lanes due to the sharp reduction in bellyhold capacity. This is expected to sustain cargo revenues for the near term. We will also continue to pursue charter opportunities, while closely monitoring for changes in demand.

As fuel prices are likely to remain weak in the near term, the Group expects to see further fuel hedging losses. The Group will keep a close watch on market developments amid current uncertainties before entering into any additional hedges.

The Group remains steadfast and agile during this period of uncertainty, and will continue to act nimbly in responding to evolving market conditions. The Group’s portfolio strategy, with a presence in both the full-service premium and low-fare segments, gives us the ability to offer the right products to match the demand when it recovers.

We have set up an internal task force to review all aspects of our operations to ensure that we are ready to ramp up services when air travel recovers. This includes any modifications to our inflight products and end-to-end service delivery to provide additional health and safety assurances to our customers and our crew.