LATE in June, Singapore Airlines (SIA) said the board of NokScoot - a Thailand-based mid-haul low-cost carrier (LCC) in which it has a 49 per cent effective stake through subsidiary Scoot - has passed a resolution to liquidate the troubled airline amid the Covid-19 crisis.

 

While NokScoot' s associate value on the SIA book is currently zero given ongoing losses, SIA will record a total one-off charge of S$123.6 million for the first quarter ended June 30, 2020. This comprises a S$106.9 million charge mainly due to impairment of SIA' s book value of seven Boeing 777-200 aircraft which had been leased to NokScoot, and provisions by Scoot of S$16.7 million to cover its share of liquidation and related costs.

 

The joint venture with Thailand-based airline Nok Air has been unable to record a full-year profit since its inception in 2014, due to difficulties in growing the network and the intense competitive environment. The Covid-19 pandemic compounded its woes.

 

When the joint venture between Scoot and Nok Airlines was sealed, SIA considered NokScoot an important component of its new diversified strategy at that time which included investments in airlines outside its home market.

 

Before the Covid-19 pandemic, NokScoot was strategic for SIA because the national carrier was exploring growth opportunities in markets with large " true-origin/destination" domestic and international traffic and significant links to Singapore. The joint venture airline also served as a dominant growth strategy to indirectly check the growth of Thai AirAsia X, another Thailand-based mid-haul LCC affiliate of Malaysia' s AirAsia Group and a competitor of Scoot&rsquo s.

 

Thailand was Asia' s premier tourist destination and a logical hub for Scoot to expand to. The joint venture airline aimed to develop a new market segment and to offer Thai consumers and travellers to Thailand more travel options. But the Covid-19 pandemic changed all that, and is forcing a rethink in not just SIA, but airlines all over the world.

 

Further impairments can be expected. NokScoot' s seven Boeing 777-200ER are 17 to 19 years old. SIA will impair S$15.3 million on average per aircraft. According to Citi, SIA has another five 777-300 and seven 777-200ER aged 15 to 19 years old on the balance sheet. All these older 777s could be retired within fiscal year 2021, which may incur around S$180 million impairment in total. That is about 1.6 per cent of SIA' s market value.

 

While the S$107 million charge announced and the estimated S$180 million impairment risks may not sound a lot, it pays to bear in mind that SIA has yet to announce any major business resizing that may lead to additional impairments such as retiring Airbus 380s - an aircraft type with limited liquidity where SIA owns 15 on the balance sheet.

 

SIA may have secured fresh liquidity after recent rights and convertible bonds issues, but investors should be aware of the implications on its book value should it decide to downsize its fleet and have to book further impairments in this time of limited air traffic amid ongoing travel restrictions.

 

While demand for air travel will not disappear altogether, the Covid-19 pandemic has created an environment where passengers will demand to know a lot more about their flight than just the price of the ticket. At least, until a vaccine for Covid-19 is found.