Capacity cuts are expected by the Singapore Airlines Group (SIA) as it cautions of substantial impact to the company’s financial health in the quarter which ended on 31 March.
On 24 March, short-term visitors were banned from entering and transiting the country. SIA disclosed in a stock-exchange on 15 April (Wednesday) that “capacity was further rationalised in response”.
The combined capacity of SIA and SilkAir was cut by 96 per cent by the end of last month, whereas 98 per cent of network has been suspended by Scoot until the end of April. Also, SIA stated that it would ground 138 of the 147 aircraft of SIA and SilkAir, alongside two of the 49 aircraft of Scoot.
“Looking forward, the group may need to extend these capacity cuts if border controls and travel restrictions remain in place and travel demand continues to be low. Operating this limited schedule will have a severe impact on the group’s financial performance,” according to the newest statement by SIA.
The cut in passenger operations has greatly squeezed overall cargo capacity, even though freighter aircraft operation and cargo demand have been holding up. Thus, selective deployment of passenger aircraft on cargo-only flights has been done by SIA in order to meet the demand of global supply chains.
Based on Cirium fleet data, SIA has seven Boeing 747-400 freighters in its fleet.
In March, there was a 60.4 per cent decline of Revenue Passenger Kilometers (RPK) based on year-on-year comparison amidst a 43.8 per cent fall in capacity. Also, passenger load factor decreased by 24.1 percentage points to 57.4 per cent. On the other hand, Freight Tonne Kilometer (FTK) declined 28.8 per cent against the 34.7 per cent fall in capacity. This pushed cargo load higher by 5.7 percentage points to 68.2 per cent.
The collapse in passenger traffic has severely crimped revenues and SIA expects significant impact on its financial performance in the most recent concluded quarter.
“While the capacity cuts and other cost management measures that SIA has implemented have helped to reduce expenditure, many costs are unavoidable regardless of the number of flights mounted. That means these measures will not fully offset the contraction in passenger revenue,” SIA explained.
SIA also pointed out that the oil price shock has exacerbated the damage. With the scale of flight cancellations, the airline is now over-hedged against fuel consumption.
“Surplus hedges will need to be marked to market as at 31 March 2020, a date on which the Brent oil price was close to its 10-year low, and are expected to generate substantial losses,” SIA added.
Based on the annual report of SIA for financial year (FY) 2019, the airline stated: “As at 31 March 2019, the group had entered into longer [D]ated Brent hedges with maturities extending to FY2024/25 that cover up to 46% of the group’s projected annual fuel consumption, at average prices ranging from $58-63 per barrel.”
The report elaborated further that SIA’s sensitivity to jet fuel price means that an increase of US$1 (S$1.42) for each barrel of jet fuel can cost S$56.7 million on the airline’s annual fuel costs for the year. This assumes no changes in factors like fuel surcharges as amount of fuel to uplift while also excluding the impact from hedging.