This afternoon Singapore Airlines released unaudited financial results for both its fourth quarter and full financial year 2019/20, with the group recording a record quarterly operating loss of S$803 million and a its first ever full-year net deficit totalling S$212 million.
While the root cause has obviously been the global COVID-19 pandemic, all but wiping out demand for air travel, SIA has also been hit with a significant fuel hedging loss in the final quarter totalling S$908 million. That’s more than eight times the cumulative fuel hedging losses for the group over the previous three quarters.
These results are certainly a far cry from the group’s most recent quarterly update in mid-February 2020, when Singapore Airlines was reporting strong results from its wide-ranging transformation programme and boasted of a solid position to weather the challenges forecast to be posed by COVID-19.
The group also stated that their hedging policy “provides stability in net fuel costs”.
At the time of course, SIA didn’t have a crystal ball. The effects of COVID-19 were predominantly impacting only flights to and from China, and jet fuel was hovering around US$534 per tonne.
Fast forward only six weeks to the end of the financial year in late March 2020, and the airline was announcing an almost total cessation of operations, cutting 96% of flights from April 2020, having already suspended almost half its flights in the final few months of March.
To add insult to injury, the pump price for jet fuel had plummeted to around US$230 per tonne.
The impact on the aviation industry is well documented, with Changi Airport recently revealing that only around 800 passengers a day were being processed through the facility in April 2020, a 99.5% drop.
Today, the group announced a record quarterly net loss of S$732 million and a record (first ever) full-year loss of S$212 million, having accrued a S$520 million net profit and S$862 million operating profit during the first three quarters of the financial year from April to December 2019.
The group’s operating loss during the fourth quarter (January to March 2020) stood at S$802 million, with net loss at S$732 million. The airline stated that “market conditions deteriorated abruptly in February 2020 as the Covid-19 outbreak started to spread globally”.
“All passenger airlines in the Group were adversely affected by the Covid-19 pandemic in the final quarter of FY2019/20, leading to a sharp deterioration in operating performances for the financial year.” Singapore Airlines
“The Group reported a net loss of $732 million for the quarter, a reversal from a profit of $203 million last year (-$935 million). This arose mainly from the deterioration in operating performance (-$1,056 million), partially offset by higher tax credit (+$184 million).” Singapore Airlines
Here are the operating profits of each group division in FY 19/20, compared to the previous financial year.
nm – not measurable
Operating profit for the financial year stood at S$59.1 million, a 94.5% reduction from the S$1,067.1 million during the previous year.
Despite what the SIA Group described as “strong results” in the first nine months of the financial year, it was actually only two of its major divisions ‘in the black’ during that period; Singapore Airlines’ mainline operation and SIA Engineering Company (SIAEC).
Both Scoot and SilkAir had already clocked up losses during the April 2019 – December 2019 period, of S$73 million and S$12 million respectively.
Here’s how each division fared during the full financial year.
The mainline carrier recorded the following results during the financial year.
* Singapore dollars
Operating profit was very positive during the third quarter of the financial year, as the transformation programme was credited with generating strong results.
Quarter 4’s performance wiped out all of the excellent Q3 gains, reducing the airline’s full-year operating profit to S$294 million, while load factor reduced by close to a fifth.
“Operating profit for the Parent Airline Company fell $697 million (-70.3%) year-on-year to $294 million. Passenger flown revenue increased slightly by $8 million (+0.1 %) as the strong passenger revenue performance observed in the first nine months of the year (+$706 million year-on-year) cushioned the fall in passenger revenue in the final quarter (-$698 million year-on-year).” Singapore Airlines
This passenger falloff was likely most significant in March 2020, but effectively COVID-19 was the undoing of almost all the year’s gains.
* Singapore dollars
Scoot suffered a fall in load factor in the fourth quarter of the financial year, as it scaled back services to mainland China (making up a third of its operations) and the impact of COVID-19 restrictions began to dent demand for travel.
“The poor [Scoot] revenue performance for the year was largely due to the outbreak of Covid-19 in the fourth quarter.” Singapore Airlines
Overall, the budget subsidiary recorded a S$198 million full-year operating loss, having only made a small profit in the October – December 2019 quarter.
Scoot has now not made meaningful profit in any single quarter for two consecutive years, having recorded only modest S$1m gains in two quarters of FY 18/19, with multi-million dollar losses in the other two quarters that year.
SilkAir was already suffering from the grounding of the Boeing 737 MAX aircraft during the last financial year, so it looked unlikely the subsidiary would post a full-year profit even without the COVID-19 impact.
* Singapore dollars
Clearly in the final quarter the regional subsidiary’s fortunes took a turn for the worse, with flights around one fifth emptier than before and an operating loss of S$100 million for the January to March 2020 period.
Six of the airline’s brand new Boeing 737 MAX 8 aircraft remain in long-term storage at Alice Springs Airport in Australia.
SIA Engineering Company
* Singapore dollars
The SIA Engineering Company (SIAEC) is so far the only major group division apparently relatively immune from the COVID-19 outbreak, with consistent profits throughout the year.
Sustained profits in SIAEC are likely to continue given the workload involved in maintaining over 50 of the group’s aircraft currently not being used and parked at Changi.
Fuel hedging losses
Singapore Airlines forewarned the market in April 2020 that its fourth quarter and financial year 2019/20 would be impacted by “substantial” fuel hedging losses.
By 30th January 2020, the group had hedged 51% of its jet fuel requirements for the April 2020 – March 2021 period at US$74 per barrel and 22% of its Brent oil requirements for that period at US$58 per barrel.
On 2nd April 2020 Jet fuel was priced at around US$30 per barrel, while on 31st March 2020 the spot price of Brent crude oil was just US$14.85 per barrel.
The airline has now recorded what it calls a “fuel hedging ineffectiveness” (a fuel hedging loss) of S$710 million, in addition to its usual ‘miss’ on future prices.
“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.” Singapore Airlines
This needs to be added to the ‘regular’ fuel hedging loss of S$198 million during the quarter. That’s a grand total of S$908 million loss attributable to fuel hedging in the last three months of the fiscal year.
What is fuel hedging? Fuel hedging, common practice in the airline industry, is a way of providing protection against fuel price variations by locking in prices for the longer term. That’s vital because fuel makes up so much of an airline’s costs – around 30% of total annual expenditure in the case of the SIA Group, so there must be certainty about what that cost will be.
Airlines are effectively giving up some profits (when actual fuel costs over the period of a hedge are lower than the hedge rate) in order to provide certainty, with the flip side being that a fuel hedge gain can also happen when the price of fuel increases during the hedge.
Unfortunately for SIA the ‘double whammy’ of collapsing global oil prices and a significant fall in fuel consumption due to capacity reduction has led to what’s likely the biggest fuel hedging loss it has ever seen.
SIA had also suffered fuel hedging losses for the previous five consecutive quarterly periods, paying more for its hedged fuel than the market rate for well over a year even before this quarter.
Fuel Hedging Losses
“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.” Singapore Airlines
As hedges expire in coming quarters (remember we’re already halfway through FY 20/21 Q1) we can expect further fuel hedging losses in the current financial year as significant quantities of fuel go unused.
How it compares to SARS
The severe acute respiratory syndrome (SARS) outbreak of 2003 did have a significant financial impact for SIA.
The group reported a loss of S$312 million in the first quarter of the 2003/04 financial year, having cut capacity by a third and almost halved flight volumes. That’s less than half the net loss we’ve seen in the fourth quarter of the last fiscal year.
However with SARS there was a quick recovery. By the July – September quarter of that year, the airline had reversed its fortunes posting a S$306 million profit, finally ending the 2003/04 financial year with a net profit of S$849 million.
With global air travel effectively decimated, the impact of COVID-19 is without a doubt significantly worse than that of the SARS outbreak.
In fact SIA has enjoyed an unbroken record of full-year profitability through previous crises, including SARS, 9/11 and the global financial crisis (GFC).
Three-quarters of the cargo carried by Singapore Airlines travels in the holds of its passenger aircraft. Only the remaining 25% flies on its fleet of seven dedicated freighters, so the impact of gradually declining passenger operations towards the end of Q4 became apparent.
Overall, cargo load dropped by 13.4% during the three months between January and March 2020, compared to the same period the previous year.
The group recorded lower cargo revenue (-S$269 million) for the full year, following reductions in cargo loads of 9%.
“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.” Singapore Airlines
We analysed how Singapore Airlines is launching two passenger aircraft with only freight in the holds for every one taking passengers in our recent analysis, showing how at least 80 such flights depart from Changi each week.
Singapore Airlines has a significant ongoing fleet renewal programme, including the following aircraft still due to arrive over the coming years:
- 30 Airbus A320neo (for Scoot)
- 6 Airbus A321neo (for Scoot)
- 19 Airbus A350-900
- 31 Boeing 737 MAX 8 (for SilkAir)
- 20 Boeing 777-9
- 3 Boeing 787-8 (for Scoot)
- 2 Boeing 787-9 (for Scoot)
- 29 Boeing 787-10
In order to reduce capital outlay, SIA is in discussions with both Airbus and Boeing with a view to reducing the arrival rate of new aircraft into the fleet.
“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.” Singapore Airlines
At least 12 Airbus A350s and three Boeing 787-10s were due to arrive at the mainline carrier alone between now and the end of 2020, so it will be interesting to see how many are actually delivered.
The airline is also engaging in possible sale-and-leaseback transactions on a number of its owned aircraft fleet to raise additional capital during this downturn.
“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.” Singapore Airlines
It’s sad to report on brand new records Singapore Airlines is setting that it likely wishes it wasn’t.
From 96% capacity cuts for at least three consecutive months to the worst single quarter loss and the first ever full-year loss in the carrier’s 48-year history, these are truly demanding times for the airline.
Singapore Airlines and SilkAir are continuing to cut around 96% of original planned capacity through to the end of June 2020, while budget subsidiary Scoot has extended its 98% capacity cuts until at least 31st May 2020.
(Cover Photo: Uskarp / Shutterstock)