SINGAPORE Airlines is committing to a strategy of working with international partners and operating overseas hubs after Covid exposed the financial dangers of not having a domestic aviation market.

 

The airline is open to opportunities and will evaluate potential synergies, chief executive officer Goh Choon Phong said in an interview with Bloomberg News.

 

Goh, a 58-year-old industry veteran who joined Singapore Airlines in 1990 and became CEO in 2011, is trying to guide the carrier out of the toughest period in its history. This time last year, it had just announced a record annual loss and was flying only a few thousand people a month compared with as many as 2 million in pre-Covid times. Unsure when matters might improve, the airline had to raise billions of dollars to get through the crisis.

 

Now that Singapore and most other countries around the world have opened again for quarantine-free travel, Singapore Airlines was able to increase traffic to more than 1 million passengers in April, the most since the pandemic began.

 

Importance of India

 

Goh highlighted India as a key growth area, saying it is expected to become the world&rsquo s third-biggest aviation market by the middle of this decade, if not before. 

 

Singapore Airlines teamed up with Indian conglomerate Tata Sons to form full-service carrier Vistara, which started flying in 2014. Vistara now serves 9 overseas destinations and 31 in India, though it has yet to make a profit.  

 

&ldquo India is obviously a very important one because it&rsquo s going to be massive,&rdquo Goh said. &ldquo We want to continue to look at scaling up Vistara and ensuring that it grows well.&rdquo  

 

Apart from the huge domestic market - already the world&rsquo s third largest - India&rsquo s allure also lies in international passengers. Close to 4.8 million people traveled between India and Singapore in 2019, before the pandemic, data from India&rsquo s Directorate General of Civil Aviation show. 

 

With Vistara, Singapore Airlines aims to cater to Indians flying to Europe and the US, poaching them from Gulf rivals that dominate the Indian overseas air-travel market.

 

Goh refused to be drawn when asked if Singapore Airlines would be interested in buying a stake in Air India, saying the company doesn&rsquo t comment on confidential discussions it may or may not be having with partners. 

 

&ldquo What I can tell you is that both Tata Sons and ourselves are equally committed to ensure that Vistara continues to grow,&rdquo he said. 

 

Tata is majority owner of 4 airlines - Vistara, Air India, AirAsia India and Air India Express - prompting speculation that it may consolidate or reorganise them into low-cost and full-service models. India doesn&rsquo t allow foreign carriers to hold more than 49 per cent of a local airline, so any reorganisation may bring down Singapore Airlines&rsquo s stake in Vistara, unless it invests further.

 

Thai setback

 

When Singapore Airlines tried a hub expansion in Thailand, it wasn&rsquo t a success. 

 

Its budget carrier unit Scoot set up NokScoot Airlines, a venture with Nok Airlines, in 2014 to provide services for short- and medium-haul flights from Thailand. NokScoot&rsquo s board decided to liquidate the business in June 2020 after failing to fully start operations of the low-cost carrier.

 

&ldquo I&rsquo m not ashamed to say that we have tried for example, in Thailand, with NokScoot and of course, with the pandemic it became very difficult,&rdquo Goh said. 

 

&ldquo What is important really is the strategy of identifying the right partner to work with in the multi-hub scenario,&rdquo he said. &ldquo It may not work, but that should not deter us from doing what we think is the right strategy. And we must be willing to take some risk.&rdquo    

 

Codesharing and alliances

 

Another avenue of growth is establishing and deepening partnerships with other carriers through codesharing and joint-marketing activities, which helps expand networks at less of a cost. Singapore&rsquo s competition regulator granted conditional approval on May 10 for an agreement with Malaysia Airlines that includes revenue-sharing on some flights. The regulator is also assessing a similar partnership with All Nippon Airways.

 

Singapore Airlines, a member of Star Alliance, already has partnerships with Air New Zealand, Deutsche Lufthansa and Scandinavian carrier SAS. Through its various tie-ups, the airline has been able to add more than 200 new destinations to its network, according to Goh.  

 

&ldquo This thing about not having a domestic market is something you cannot overcome on your own,&rdquo he said. 

SINGAPORE Airlines : C6L +0.18%(SIA) is wooing premium passengers with its upgraded airport lounges that cost S$50 million for the makeover, signalling its confidence in premium travel.

 

The airline&rsquo s improved and larger facilities are being put into service at a time when many of its peers are ramping up resources to capture pent-up travel demand - and market share - in the post-pandemic world.

 

The mainboard-listed airline&rsquo s chief executive Goh Choon Phong told the media on Monday (May 30): &ldquo We are confident in the growth in premium travel. If you look at this part of the world... the economies in this part of the world are expected to grow faster than most other economies around the world. So with that, we expect that business travel and premium travel will also increase.&rdquo

 

He also said that most of the aircraft that were mothballed since the pandemic started in early 2020 have already been flown back from Alice Springs. Planes that are still in the Australian storage facility are meant for disposal.

 

The planes had been taken out in anticipation of a further ramp up in passenger capacity.

 

The airline group is expecting passenger capacity to rise to 67 per cent of pre-pandemic levels by September. If the ramp-up takes place faster, the pay cut restoration for its pilots &ldquo will be earlier&rdquo , said Goh.

 

SIA pilots&rsquo basic pay was sharply cut when the aviation industry hit turbulence as the pandemic unfolded. With recovery on the way, the carrier is gradually reinstating pilots&lsquo basic pay, with the wage cuts to shrink every quarter until salaries are fully restored by the start of 2023.

 

The airline group&rsquo s path to recovery was fast tracked in April, when Singapore significantly relaxed its border restrictions and testing requirements - in line with the city-state&rsquo s stance to live with the endemic.

 

Passenger traffic has taken off dramatically, consequently.

 

But high demand and elevated fuel prices have led to rising air fares. SIA has been &ldquo discussing with our partners&rdquo when asked if it would, like Cathay Pacific, offer a &ldquo buy now pay later&rdquo programme.

 

Opening the lounges on Monday, Transport Minister S Iswaran said: &ldquo The timing of the opening of these lounges is significant and salient. It occurs just as SIA is emerging, severely tested, but ever resilient from the toughest crisis in its history... (The opening) is a happy occasion and importantly a harbinger of a resilient and thriving SIA, our Changi aviation hub and an encouraging future for the aviation sector.&rdquo

 

The 4 lounges at Changi Airport Terminal 3 with 30 per cent added space and seats post-revamp have a total capacity to host around 1,150 flyers. The facilities are open to the carrier&rsquo s most premium class, first class, and business class customers, as well as its premium frequent flyers and those of the airline alliance, Star Alliance.

Alfie Kwa  |    May 29, 2022, 11:32 PM

possibly will rise up strongly

 

DBS thinks SIA will fare better than its regional peers, thanks to Singapore' s VTLs and the reopening of borders.

 

DBS Group Research&rsquo s Paul Yong and Jason Sum have maintained their &ldquo buy&rdquo call and target price of $6.20 on local airline carrier Singapore Airlines (SIA) as they expect the company to recover faster than its regional peers.

 

Despite its 4QFY2022 ended March being in the red, the analysts say this is within expectations, and highlighted the fact that passenger revenue surpassed cargo revenue, as well as that SIA was now in a cash surplus position. SIA also managed to narrow losses significantly for FY2022, on the back of improved passenger traffic.

 

Sum and Yong note that SIA&rsquo s international passenger traffic has been recovering at a faster clip than its peers since Singapore launched its first Vaccinated Travel Lane (VTL) in September 2021.

 

&ldquo We expect this trend to persist and envisage the group&rsquo s passenger traffic hitting 72% and 97% of 2019 levels by end-FY2023 and end-FY2024, respectively, supported by Singapore&rsquo s new Vaccinated Travel Framework and the synchronised reopening of borders in the region and other key markets.&rdquo

 

Furthermore, the &ldquo colossal&rdquo pent-up travel demand and the gradual restoration of passenger capacity will support passenger yields, they say.

 

At the same time, cargo yields should remain high in the near-term due to prolonged widespread supply chain disruptions.

 

As for its share price, the analysts say that SIA&rsquo s valuation may be above its historical mean, but still cheaper than competitors in the region.

 

The airline is currently priced at a FY2023 P/B ratio of 1.2x, at around 1 standard deviation (SD) of its 10-year mean.

 

&ldquo We believe that its relatively promising recovery trajectory and medium-term outlook justify a multiple that is on par with peers,&rdquo Sum and Yong write.

 

The analysts also acknowledge that they have earnings estimates above the consensus, as they expect SIA&rsquo s passenger volumes to normalise at a faster rate and assume higher passenger and cargo yields.

 

However, some key risks to their view include repeated Covid-19 episodes impeding the recovery in air travel, as well as passenger and cargo yields moderating to pre-pandemic levels earlier than expected.

MANDATORY convertible bonds (MCBs) sold by Singapore Airlines : C6L +0.18% (SIA) over the last 2 years could offer an interesting investing opportunity amid growing optimism that the carrier is firmly on a recovery track.

 

On Monday (May 23), the MCBs issued in 2020 were trading marginally below par, at S$0.990. The 2021 tranche of MCBs was trading at S$0.958.

 

The zero-coupon MCBs worth S$9.7 billion in total issue value with maturity in 2030 were liquidity lifelines for the mainboard-listed airline when it was pummelled by the pandemic and navigating the toughest year in its history in 2020.

 

The MCBs were initially shunned by investors partly because they can only be redeemed at the option of SIA, failing which they will be mandatorily converted into new SIA shares after 10 years.

 

With the reopening of international borders, however, it is looking increasingly likely that SIA will have the financial capacity to redeem the MCBs and avoid a significant expansion in its share base.

 

For FY2022, SIA&rsquo s annual net loss dipped by nearly 80 per cent to S$962 million and the group managed to achieve an operating cash surplus of S$824.4 million.

 

The carrier also reported a passenger load factor of 72.7 per cent for April &mdash   the highest since the pandemic hit global shores in early 2020. 

 

Now that the carrier&rsquo s cash burn has stopped and is taking off on the recovery path, analysts have raised their forecasts for the group&rsquo s FY2023 earnings. One analyst even thinks SIA could possibly redeem the MCBs as early as FY2023, over 2 batches with the second redemption in FY2024.

 

The analyst from UOB Kay Hian, Roy Chen, noted that the redemption value of the MCBs stood at about S$10.1 billion as at end March, less than SIA&rsquo s cash holding of S$13.7 billion. He thinks that SIA could refinance the MCBs with straight debt.  

 

Indeed, the airline acknowledged that it has no need to maintain a large cash balance, in response to a question at last Thursday&rsquo s results briefing. However, as it has just begun on its recovery path, it wants to be sure about the sustainability of its operating cash flows before addressing the structure of its balance sheet.

 

While SIA has no definitive plan at this point in time to redeem the MCBs, it said it will consider doing so during a future review of its balance sheet. SIA has the option to redeem the MCBs in whole or in part on every 6-month anniversary of the issue dates.

 

Should SIA redeem the MCBs &mdash at a yield of 4-6 per cent depending on when the redemption is the MCB holder who buys the security from the stock exchange below S$1 &mdash   like now &mdash would get a yield higher than the nominal rate.

 

The carrier will pay MCB holders a yield of 4 per cent per annum if the fixed-income security is redeemed within the first 4 years,   5 per cent per annum if redeemed between the fifth and seventh year, and 6 per cent beyond that and before maturity,   compounded semi-annually.

 

What could stop SIA from redeeming its MCBs in the near future? Refinancing the MCBs with straight debt would push SIA&rsquo s gearing ratio up. This could have implications for SIA&rsquo s outstanding bonds or other borrowings, which may have covenants stipulating that the carrier must maintain a certain level of debt-equity ratio or other financial metrics.

 

Investors who purchase SIA&rsquo s MCBs also face the risk of the market value of these instruments dipping as interest rates rise. Bond prices move in opposite directions with interest rates. MCB holders who choose to sell before maturity may realise a capital loss.

 

If SIA does not redeem the MCBs, they will eventually be converted into new shares at S$4.84 per share (subject to adjustments in certain events). With the steep recovery in SIA&rsquo s shares in recent months, this is no longer a frightening prospect. On Monday, SIA&rsquo s share price closed at S$5.48.

 

The bulk of the MCBs were taken up by Temasek when they were issued. Public investors might now have an opportunity to get in at a lower price, at a time when SIA&rsquo s prospects look much brighter.