SIA Group has set aside S$3.3 billion ($2.3 billion) of the S$8.8 billion it plans to raise, from issuing equity and mandatory convertible bonds, for aircraft purchases and aircraft related payments.
“The rationale for these [aircraft] purchases remains valid even under the present scenario given that it would enable SIA to proceed with its adoption of new-generation aircraft, both as replacement for existing fleet and for growth, as these new generation aircraft will not only provide an enhanced travel experience to our customers but also, provide better operating efficiency and lower emissions,” the group said in response to questions from the Securities Investors’ Association (Singapore) (SIAS), as disclosed to the Singapore Exchange.
Cirium fleets data shows that the group expects to receive 18 aircraft for the rest of 2020, and another seven in the first quarter of 2021. These comprise seven Airbus A320neo family aircraft and five A350s, nine Boeing 787s, along with four 737 Max 8 jets, which have yet to be re-certified following a global grounding in March 2019.
SIA says: “We believe that the proceeds of S$8.8 billion from the rights issue will allow us to meet our liquidity and operational requirements, including operating cash flow needs, capital expenditure requirements and fixed obligations, for a good part of financial year 2020/2021.”
The group will utilise S$3.7 billion as operating cash flow, for funding fixed costs and other operating expenses incurred “during this period of reduced operations and the subsequent recovery period”. The remaining S$1.8 billion will service debt and other contractual payments.
“Furthermore, up to S$6.2 billion of additional [mandatory convertible bonds] may be issued within a 15-month period after the EGM [on 30 April], which will provide us with additional liquidity if this crisis extends for a prolonged period.
“This will also provide us with the resources to capitalise on any opportunities that may arise following the abatement of the Covid-19 pandemic from a position of strength, and position us for growth as soon as the ongoing crisis resolves.”
In response to why SIA opted for equity rather than debt financing, the group says it has become very difficult for airlines to tap the debt capital markets.
“We will continue to explore other traditional funding channels such as secured financing and sale-and-leaseback transactions but the opportunities remain limited in the current climate and it would not be possible to raise a similar quantum from these channels.
“Moreover, such transactions would create more cash outflow obligations on the airline during this period when liquidity is severely challenged.”
With this approach, SIA says it can “treat the entire capital raised as equity”, which will strengthen its balance sheet “rather than burden [it] with high levels of debt that may restrict our ability to raise further financing in the future”.
The group states that it is not clear how the airline industry will recover, and which segments or markets will first see growth, but expects its portfolio strategy to “give us the right products to meet the demand when it returns” while its global network will allow it to “flexibly deploy capacity to meet demand from different markets as air travel returns”.
“The rights [issue of mandatory convertible bonds] also provides SIA the option to redeem it with internal cashflows, or refinance through other financing sources when markets recover.”
For now, SIA has cut its scheduled capacity by 96% while the outlook remains murky.
“SIA expects to operate a significantly reduced capacity for the foreseeable future until global travel restrictions and border controls are progressively lifted, and the demand for air travel begins to pick up once again,” the group says.
“However, it is not clear when this will happen.”