Singapore Airlines:
The Support of Temasek Nov/Dec 2023

Quite extraordinary! Singapore Airlines appears to have emerged from the pandemic in better financial health than it had before the onset of the existential threat to the industry provided by Covid-19.

For the two years that Singapore’s borders were effectively closed, SIA’s passenger business evaporated and it lost a total S$3.1bn at the operating level over the period, and reported net losses of S$5.2bn.

Traffic and capacity levels are now approaching pre-pandemic levels. The group’s aircraft fleet is fourteen units larger than it was at the beginning of 2020. Its gross long term debt and lease liabilities on the balance sheet of S$12bn (US$8.9bn) at the end of March 2023 was 50% higher than in March 2020, but its near S$17bn (US$12.2bn) of cash gives it an unusual apparent year-end net cash position.

For the year to end March 2023 SIA reported a record level of revenues, 10% above its previous peak, and record operating profits of S$2.7bn; net profits of S$2.2bn didn’t quite reach the peak reported in 2007, but were three times the average annual net income produced during the 2010s. And then for the six months ended Sept 2023 it reported record half year results.

How?

Maybe Singapore, and the SIA management, with its experience of the 2003 SARS epidemic, recognised the signs before most others.

The country registered the first Covid-19 case outside China on 29 Jan 2020 and flights to Wuhan were curtailed.

Demand dropped precipitously, even before the World Health Organisation (WHO) declared a state of pandemic, and SIA scrambled to cut capacity as passengers stayed at home. In January 2020 SIA Group airlines (Singapore Airlines, Silkair and Scoot) had carried 3.4m passengers. The WHO declared the pandemic on the 11th March; Singapore introduced border restrictions on the 15th. In April of that year the SIA Group carried a mere 10,800 pax.

For the financial year to end March 2020, SIA Group reported the first annual net loss in its history of S$169m (mostly from the writedown of investments in Vistara and Virgin Australia, and ineffectual fuel hedges).

In the company’s recent results presentation, covering the six months to end September 2023, SIA’s CEO, Goh Choon Phong, emphasised that from the very early stages of the crisis the company had pursued three main priorities: boost liquidity, care for customers, and preserve core capabilities.

Boost liquidity

Singapore Airlines went into the pandemic reasonably well placed with S$3bn in cash — equivalent to nearly three-months' normal revenues — but saw that this could disappear quickly.

It started discretionary expenditure cuts early in February 2020, and (after lengthy negotiations with the manufacturers) deferred over S$4bn of near-term capital expenditure.

It was useful to have its freighter fleet. With the diligent use of passenger aircraft to carry cargo the group was able maintain and increase total freight carried, and take advantage of the strong increase in cargo yields during 2020 and 2021. Cargo revenues in its financial year to end March 2022 were double that of pre-pandemic levels (and accounted for 60% of group revenues).

It was one of the first carriers to tap the equity markets for liquidity in the crisis: in March 2020 it announced an emergency rights issue to raise a massive S$15bn (US$11bn) — a year’s worth of turnover — fully underwritten by the island state’s holding company (and 55% majority owner) Temasek. The funds were raised in two tranches: S$8.8bn in FY2021 and S$6.2bn the following year. Of the total S$5.3bn was vanilla equity, the remaining S$9.7bn was in the form of zero-coupon “Mandatory Convertible Bonds” (MCB), which because of the peculiarities of accounting could be treated as equity on the balance sheet.

In total since the start of the pandemic Singapore Airlines states that if raised over S$23.5bn in liquidity. We estimate that at least S$7.6bn, over a third of the funds, was provided by state holding company Temasek.

Care for Customers

Excellence in customer service has been a tenet of SIA’s operating philosophy throughout its existence, and Singapore Airlines has consistently been ranked as a five-star airline by Skytrax since 2006, and regained its accolade of “World’s Best Airline” in 2023 — for the fifth time. At the same time, SIA’s low-cost subsidiary Scoot was named “Best Long Haul Low-cost Airline”, and ranked second in the “World’s Best Low-cost Airlines” category.

It may have been difficult to continue that service orientation when there weren’t any customers, although Goh’s first example under this heading was to state that the company honoured ticket refunds, despite the cash burn. (In the US during the pandemic, customer complaints to the DoT trebled from normal times; and the top complaint was “not getting a refund”.)

He also stated that the company had reviewed the full customer journey and had enhanced over 100 “customer touch points”. When pre-departure Covid-19 testing was required, Singapore Airlines and Scoot pioneered a one-stop digital online solution. Among other things this contributed to another five-star award to the group from Skytrax for Covid-19 safety.

In the depths of the crisis, in September 2020, the company “engaged customers” through initiatives dubbed “Discover Your Singapore Airlines”. These created a number of creative revenue streams (and Frequent Flyers could use their miles):

• Restaurant A380@Changi — using a parked A380 as a restaurant selling inflight dining experience (diners getting special gifts if they turned up in traditional heritage wear);
• SIA@Home — First and Business Class home meal deliveries, some including 22-piece silver place settings, Wedgwood china and Lalique crystal (one of the options included “Book-a-Chef” — mirroring its normal inflight “Book-a-Cook” service — providing a private chef to reheat, plate and serve);
• Inside Singapore Airlines — an exclusive behind-the-scenes tour of the company’s training facilities with a wide range of activities for the entire family — kids having the option to dress up and role play as cabin crew, and take home their very own SIA sarong kebaya uniform, adults given premium in-flight wines, let loose on the flight simulators (although probably not in that order), and attending a grooming workshop.

More prosaically, in October 2020, Singapore Airlines rolled out its Kris+ mobile application: a digital “lifestyle” payment and rewards system linked to the KrisFlyer frequent flyer programme. It also introduced a new online travel-planning and booking platform named Pelago.

Preserve Core Capabilities

In his presentation, Goh firmly asserted “our people are our most valuable asset” — in 2023 Singapore Airlines once again was awarded the accolade of “Best Cabin Staff” as one of the five prizes it achieved in the annual Business Traveller Awards.

In 2020 the group implemented a hiring freeze, pay cuts, voluntary and compulsory no-pay leave. But it had to cull 15% of its 27,000 strong group workforce. Half of the 4,000 job cuts went through early retirement and natural wastage; the remainder through redundancy packages.

The Singapore Government provided job support covering 75% of the wages of locally employed staff. Goh proudly stated that over 2,000 of the airline crew took up voluntary positions in key community sectors such as healthcare, transport, and test-and-trace.

And the group supported staff in training and retraining through an “UPLIFT” programme to ensure the the group “lead the pack when travel recovery eventually occurs”. 28,000 courses were taken.

Despite the pandemic SIA remained committed to its long-standing strategy of buying and operating new generation aircraft — the fleet has an average age of only 7.2 years (half the industry average).

In the widebody fleet (see table), Singapore Airlines got rid of seven 10-year old A380s early in 2020 (five of these have since been broken up), and disposed of nine 777s, but since the start of the pandemic took delivery of 15 A350s and six 787-10s. It also acquired five 777Fs, mostly leased from and operated on behalf of DHL.

On the short haul former Silkair fleet (now merged into Singapore Airlines) it disposed of the remaining eight A319/320 aircraft and 10 737NGs, but replaced them with the delivery of 16 737MAX8s (it has another 13 on order).

Low cost subsidiary Scoot meanwhile disposed of six A320s replacing them with 12 A320/1neos and added one 787 to its widebody fleet.

Somehow the group managed to keep its aircraft and crew current through the two years of Singapore’s border restrictions. When the country removed all restrictions at the end of March 2022, 90% of the pre-pandemic aircraft, and 90% of crew resources were available to go straight back into work.

“First off the blocks”

When the country’s borders did open fully in March 2022 — Singapore was the first country in the Asia/Pacific region to remove restrictions — the group had built capacity back to around 50% of pre-pandemic levels (even though load factors were excruciatingly low at 55%). Other countries in the region began to follow suit gradually through the year.

China however — which had provided the majority of growth in the region in the previous decade — did not abandon its zero-Covid policy until the end of 2022, and only really started to relax travel restrictions from the beginning of 2023.

SIA prides itself on the fact that it could accelerate the re-introduction of services and take an advantage against its regional competitors in restoring “normal” activity (see chart).

Record profitability

For the six months ended September 2023, this preparation to be the first mover in the region’s recovery paid handsomely. SIA Group reported multiple broken records: its highest load factors (88% at Singapore Airlines, 91.3% at Scoot); highest half-year Group turnover in its history at S$9.2bn; an operating profit of S$1.6bn, 60% more than it had reported for the whole of FY2019; and a net profit of S$1.4bn aided by net interest income and associate company profits reversing prior year net interest charges and losses.

SIA and Scoot carried 17.4m passengers in the period, up 52% from the prior year, and only 9% below pre-pandemic levels: Scoot’s traffic of 6.2m pax was, perhaps surprisingly, 12% higher than in the same period in 2019.

The company attributes the strong results to “a robust demand” for air travel, led by a rebound in passenger traffic on North Asian routes following the full reopening of borders in China, Hong Kong, Japan and Taiwan. Cargo operations — which had been a life-saver for SIA during the pandemic — were muted: demand was down by 6% year-on-year; load factors dropped 8 percentage points (to 53%) as more bellyhold capacity in passenger aircraft was on offer; and yields fell by 46%. Compared with the pre-pandemic period in 2019, cargo loads are 20% lower but yields are still a third higher.

The Group took the opportunity of the strong results to redeem half of the MCBs that had been issued in 2021 for S$3.4bn. This had the effect of reducing net shareholders' funds by S$2.5bn to S$17.3bn and increasing the Group’s debt-equity ratio from 0.77x to 0.85x. Since the period end SIA announced the intention to redeem a further tranche of half the remaining the MCBs for another S$1.7bn in December.

It also announced an interim dividend of 10S¢ a share.

Strategic positioning

From the start of the pandemic, SIA was looking in depth at what the post-Covid travel and aviation markets could look like: changes in consumer behaviour, business travel trends, supply chain disruption, and the very structure of the airline industry. As the Group CEO, Goh bluntly stated In his presentation on the FY 2020 results: “This is an opportunity to strengthen our position as a global aviation leader”.

He had already streamlined the group structure and branding.

SIA Cargo, which had been a separate legal entity from 1988, was reabsorbed as a division of Singapore Airlines in 2018. In the same year SIA announced that Silkair, its full service narrowbody regional feeder subsidiary would refit its fleet with new lie-flat business class seats and seat-back entertainment systems, to align the inflight product more with the parent widebody operations, before merging it into SIA as its short-haul operation. This was completed in 2021.

SIA’s two low cost carriers — Tigerair (short-haul narrowbody) and Scoot (medium-haul widebody) — were merged in 2017 with all flights operating under the Scoot brand. SIA views Scoot as enabling the Group to “participate directly in the low cost travel segment, bringing value and greater connectivity to our customers”.

Not that Scoot fits into the classic LCC model. It has a mixture of aircraft types — 35 A320s, 21 787s with nine Embraer 190s due from 2024 “to expand regional secondary and tertiary markets”. It offers through-ticketing for connecting flights in Changi, intra-line onto its own flights, and inter-line onto SQ and other codeshare partners (currently Virgin Australia) — which adds complexity. (It also operates some very long haul flights: eg Singapore to Athens tagging on to Berlin — see map.)

But it does operate a complementary network. Of the 23 destinations in China operated by the Group (down from 25 pre-pandemic), Scoot has 16 unique points, SIA’s six and there is only one common airport. In SE Asia the Group flies to 35 points, six unique to SIA, 18 to Scoot, and they both serve 11 common destinations.

The Singapore Airlines Group consequently now primarily consists of the full service network carrier parent airline, the no-frills brand Scoot, and SIAETC (its MRO operation).

Historically well-run and profitably managed, SIA seems well-placed to benefit from its emergence from the pandemic as one of the best capitalised airlines and operationally prepared, and financially astute in the region.

But it has its weaknesses. It is based in an island state with a small population of only 5.4m. There are strong O&D traffic flows — growing as Singapore encroaches on Hong Kong’s position as the region’s financial centre. To maintain the network structure and connectivity the country wants, SIA needs to continue to operate its sixth freedom connecting hub as it has done since the 1970s.

One of the strange consequences of the post-pandemic industry restructuring has been to give the airline a new avenue of growth, and support to the idea that SIA has a multi-hub strategy. And this is in India.

National flag carrier, Air India was sold to the Tata Group in 2021 during the depths of the pandemic (see Aviation Strategy March 2023). Tata is merging it with its two existing airlines including Vistara (its loss-making joint venture with Singapore Airlines).

The result of the merger should give SIA a 25% stake in the Indian flag-carrier. It may help that the CEO of the new Air India is Campbell Wilson, formerly VP Sales & Marketing at SIA, and CEO at Scoot.