SIA warns of first yearly loss due to Covid-19 and fuel hedging losses

SINGAPORE Airlines (SIA) expects to report a small operating profit, but a net loss, for the full year ending March 31, owing mainly to fuel hedging losses, it said on Friday.

"The collapse of fuel prices in March 2020 has led to fuel hedging losses on contracts maturing in the final quarter of FY2020. The unprecedented scale of the capacity cuts by the SIA group as a result of Covid-19 has also resulted in the SIA group being in an over-hedged position with respect to the expected fuel consumption for FY2021. Accordingly, the surplus hedges need to be classified as ineffective under applicable financial reporting standards and the marked-to-market losses as at March 31, 2020 will be recognised in the profit and loss statement for FY2020," the group said in a bourse filing on Friday.

The impact of Covid-19 on SIA has been "exacerbated by the lack of a domestic market for it to fall back upon", SIA explained. As earlier reported, SIA and SilkAir have extended their combined capacity cuts of about 96 per cent until the end of June 2020, while Scoot is expecting capacity cuts of about 98 per cent.

So SIA has found itself in an "over-hedged position" for FY2021 by locking in higher prices for jet fuel though many of its planes are now grounded.

SIA will announce its unaudited financial results for the fourth quarter and full year FY2020 next Thursday. This will be the national carrier's first loss-making year in its history.

The group also expects operating cash flows to remain negative during the ongoing quarter (April to June 2020), since there are no definitive signs of the virus outbreak abating.

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SIA will not enter into any additional fuel hedging contracts for now, it said: "With fuel prices continuing to be weak since the beginning of April 2020 to date, additional fuel hedging losses may be expected in the first quarter of FY2021. Given the uncertainty in the market, we have taken a pause and plan to monitor developments closely before entering into any additional hedges."

SIA is also in negotiations with aircraft manufacturers to adjust its delivery stream for existing aircraft orders, and is in talks with various suppliers to reschedule payments, it said.

On the cargo front, SIA said it will continue to supplement freighter capacity with the deployment of passenger aircraft operating cargo-only flights.

A significant reduction in bellyhold capacity globally has resulted in strong demand for freighter services, it said: "Although cargo capacity remains below pre-Covid-19 levels, we have seen an improvement in cargo yields during the final quarter of FY2020 and this is expected to sustain into the first quarter of FY2021."

Separately, SIA noted that its 20 per cent-owned carrier Virgin Australia has entered into voluntary administration. SIA has no requirement or obligation to provide capital to Virgin Australia, it said: "We have been equity accounting for our share of losses in Virgin Australia. As at Dec 31, 2019, our carrying value was zero and we have no exposure to further losses incurred by the company. We have no outstanding loans to the airline."

SIA said it will continue to cut costs and conserve cash. It has set up an internal task force to review all aspects of its operations during this time, and to ensure that the group is ready to ramp up its services when air travel begins to recover.

"We are also studying what we may need to do to modify our in-flight products and services to provide additional reassurance to our customers, and to ensure the safety of both our customers and our crew," it said.

SIA's management team has taken 30 per cent pay cuts with effect from April 1, 2020, while directors have volunteered a 30 per cent cut in fees. Staff have been asked to take varying days of no pay leave through several schemes. SIA has also implemented a hiring freeze, deferred non-essential expenditure projects and received shareholders' approval to raise more than twice its market cap in cash.

SIA shares rose S$0.08 or 1.82 per cent to S$4.48 as at 9.47am.