SIA CEO Goh Choon Phong

Bloomberg reported that Singapore Airlines has already burned through half of the S$8.8 billion it raised through share sales earlier in just two months.

It shows that SIA keeps incurring expenses even as its planes are grounded. Of the S$4.4 billion spent since mid-June, SIA reported:

(a) S$1.1 billion has been applied towards the funding of operating expenses, settlement of maturing fuel hedging trades and ticket refunds following the cancellation of flights due to the coronavirus pandemic;

(b) S$0.2 billion or $200 million has been applied towards aircraft purchases; and

(c) S$0.9 billion or $900 million has been applied towards debt service, which included the redemption of SIA’s 10-year Fixed Rate Notes and repayment of funds previously drawn under certain lines of credit.

About S$2 billion was also used to repay a bridge loan facility earlier obtained from DBS.

The amount spent by SIA during these two months are almost equivalent to the combined net losses made by SIA (S$1.85 billion), Cathay Pacific (S1.75 billion) and Qantas (S$1.93 billion) in the first half of the year.

SIA raised the funds in June primarily with the support of its parent company, Temasek, after the COVID-19 outbreak which affected the travel industry.

Fuel hedging losses

SIA fuel hedging trade woes are not over yet for the company.

Some airlines do use financial instruments known as hedges to lock in years of fuel cost, which is one of the industry’s biggest expenses. Fuel hedging is a way of providing protection against fuel price variations by locking in prices for the longer term, so that there would be certainty in the airline’s operation cost. This would help in longer-term planning for airlines.

However, the collapse in oil prices this year has left companies “over-hedged,” effectively meaning they have bought more insurance than they need. Buying oil from the open market now is even cheaper. But since these airlines have already entered into “future” contracts with sellers, they must pay at the agreed oil prices even if they are high when the time comes for settlements. So, with or without passengers, airlines who bet on oil futures must honor the contracts they signed with sellers.

SIA suffered the first annual loss in its nearly half a century of history, in the last financial year ending 31 Mar. This was due in part to the US$638 million in charges on failed oil hedges.

According to Wall Street Journal (WSJ), U.S. carriers have in general cut back on these financial bets in recent years, after being wrong-footed by an earlier plunge in oil prices about five years ago. Many airlines instead use customer fuel surcharges as a way to adapt to changing oil prices.

But SIA continues to use oil hedging strategy. Not only that, SIA uses an “unusually farsighted approach” to manage its fuel costs, said WSJ. In recent times, SIA has hedged some of its fuel costs up to five years out, while others in the industry will generally go with a 1 to 2-year horizon. Of the 33 listed global airlines with fuel-hedging policies, SIA was by far the longest, according to Morgan Stanley research last year.

In fact in Jan this year, SIA said it had hedged the bulk of its expected fuel costs out to March 2025. For the four years from April 2021, it had hedged more than half of its fuel needs based on Brent crude at US$58 to US$62 a barrel.

Current Brent crude prices have recovered in the last 3 months but it is still way below US$50. If COVID-19 continues on with oil prices languishing, SIA will surely continue to suffer quarterly losses over its fuel bets, perhaps all the way to 2024, the year indicated by IATA that travel industry will recover from the pandemic.

Even before COVID-19, SIA had been suffering fuel hedging losses, paying more for its hedged fuel than the market rate, before the recent two quarters in the first half of 2020. Indeed, SIA already warned that it expects to see further hedging losses.

Replying to WSJ with regard to its fuel hedging endeavours, SIA said, “Given the uncertainty in the market, we have taken a pause in our current hedging strategy and plan to monitor developments closely before entering into any additional hedges.”

In other words, when one starts to lose money in casino, one needs to pause and rethink so as to plan for a new betting strategy.

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