Singapore Airlines Ltd
SGX:C6L
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Singapore Airlines Ltd
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Ladies and gentlemen, thank you for standing by, and welcome to Singapore Airlines media and analyst briefing for the first half of the 2020-2021 financial year. [Operator Instructions] Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your first speaker today, Mr. Siva Govindasamy, Vice President, Public Affairs, Singapore Airlines. Thank you, sir. Please go ahead.
Thank you, Rishi. Good morning, everyone. I'm Siva from SIA Public Affairs. I hope everyone as well. Welcome to our half year media and analyst briefing. Given the COVID-19 measures that are currently in place, we are unfortunately unable to meet everyone in person once again. However, we hope that today's virtual session will be useful. Today, we have 2 presentations. First, Mr. Stephen Barnes, Senior Vice President, Finance, will present the group's first half results. Next, our Chief Executive Officer, Mr. Goh Choon Phong, will talk about the outlook and strategy for the group. Following that, we will have a short Q&A session.
Without any further ado, I would now like to invite Mr. Barnes to make his presentation. Mr. Barnes, please.
Thank you very much, Siva. Good morning, CEO, EVPs, and good morning to all of you who have taken the time to join us for this briefing. First, for me, to take a look back at SIA Group's financial performance in the first half of the financial year. We recorded a large first half net loss coming in at $3.5 billion. First half operating result swung into a deep loss of $1.86 billion, a swing of $2.3 billion as revenues collapsed following the slump in traffic. The reduction in passenger flown revenue was partly mitigated by the reduction in expenditure as capacity was cut and by growth in cargo revenues. The operating loss included a charge of $462 million for fuel hedging ineffectiveness. And this is why the group is working hard to support all efforts to reopen borders and reinstate passenger operations.
The net loss were struck after recognizing nonrecurring charges of $1.7 billion. The major items are noted here: Note, in particular, the $1.3 billion aircraft impairment, which comes about upon completion of the network and fleet review. We anticipate that this review may conclude that some of our older generation aircraft may be surplus to our future requirements, and alerted the market the possibility in July. But perhaps note also the decision to write-down the goodwill that we recorded when the group gained control of Tiger Airways in 2014. With so few flights being mounted and many aircraft grounded, it is prudent to write-down the goodwill asset.
A highlight is the 80% drop in revenue during the first half. As already mentioned, this comes about from the collapse in passenger traffic, partially mitigated by growth in cargo revenue. Total expenditure on the other hand, fell by only 56%, although by 60% in the second quarter. This is because many of our costs are fixed or at least fixed in the short term. As a result, expenditure cannot fully adjust to the 80% drop in revenue.
At the end of the first quarter, following a downward reassessment of the pace at which we expect to be able to recover our capacity, we recognize that our future fuel consumption is likely to be lower. And that means that more of our fuel hedges are ineffective. Therefore, we had to recognize in our P&L the $462 million revaluation losses that had been sitting in our reserves. In addition, fuel prices fell between 30th June and 30th of September, and so we booked $100 million revaluation loss in the second quarter on the fuel derivatives that have been dedesignated as hedges. The overall impact of these factors is a $2.3 billion reduction in the operating result, for a first half operating loss of $1.86 billion. I will talk about -- I will talk more about the decline in the net results shortly.
So I'm on to Slide 6. The main reason for the 80% drop in revenue, as I've mentioned, was the collapse in passenger flown revenue due to travel restrictions.
On Slide 7. The pie chart shows that the dominant source of revenue is now cargo flown revenue, contributing over 75% of the total. Cargo flown revenue was up $274 million, as you can see. It was driven by stronger cargo yield performance, partially offset by a decline in loads carried. Loads were, in fact, constrained by the drop in capacity caused by the reduction in bellyhold capacity with the drop in passenger flights. Therefore, great efforts have been made to increase cargo capacity by flying passenger aircraft that only carry cargo and even removing seats to make more room. However, passenger flown revenue was down by nearly 98%. All 3 airlines operated networks to provide essential connectivity only since April 2020. This means that passenger capacity was cut dramatically, which you can see in the far right column. Carriage fell even more. So the passenger load factor across the 3 airlines fell from 85% to 16%. With fewer than 1% of last year's passenger numbers, the increases in yields could only mitigate the effect on revenue so much.
Let me also highlight the drop in engineering services revenue, which was mainly attributable to flight cancellations by all other airline customers, which caused sharp reductions in airframe and line maintenance revenue and engine and component revenue. Group expenditure. I apologize. Yes. Group expenditure, also fell dramatically, but it lagged the drop in revenue.
Let me focus on Slide 9 on fuel hedging ineffectiveness and fair value loss on fuel derivatives. The ineffectiveness was $462 million, as I mentioned earlier. This arose from the slower-than-expected recovery of passenger capacity resulting in more fuel derivative contracts in both the current and the next financial year being dedesignated as hedges. In addition, there was a fair value loss on fuel derivatives of $102 million, which arose from revaluation of fuel derivative contracts that have already been dedesignated as hedges. Fuel costs itself, after hedging decreased by nearly $2 billion, reflecting the cuts in passenger capacity, offset only partially by the increased utilization of freighters and mounting of passenger aircraft carrying cargo flights.
Staff costs fell $939 million. This came mainly from 3 sources: firstly, lower pay and allowances, and actually a substantial source of that reduction came from grants received under the Singapore Budget 2020 to aid businesses affected by COVID-19. But there has also been a significant contribution from other staff cost management measures such as salary cuts, no-pay leave, furlough and others. One of the consequences of the steep drop in flying hours due to capacity cuts is a substantial drop in crew allowances. And finally, there is no provision for a profit-sharing bonus for this year at this stage.
Depreciation for aircraft relates to an enlarged aircraft fleet over the prior 12 months, partially offset by the return of a number of aircraft to lessors. The reduction in other cost items was tied to the reduction in flying and the reduction in carriage.
Take a look at the fuel cost, can see that the dominant feature here is the reduction in fuel consumption, supported also by a lower weighted average fuel price, which was offset by the hedging loss versus a gain in the prior year, contributing overall to an 84% reduction in our fuel bill. I'm sure you will recall that we recorded a large operating loss in the fourth quarter of the last financial year as the effects of the pandemic began to spread across the globe. Similar losses have continued through the first half of this financial year, due mainly to the reduction in revenue and partly to the impact of ineffective fuel hedges.
So if we look at the overall impact or the various impacts on operating performance, the dominance impact is the reduction in passenger flown revenue, partially offset by the improvement in cargo flown revenue and lower net fuel costs. An additional charge relating to fuel hedging ineffectiveness, but then reductions in many other costs, including staff costs; handling charges; landing, parking and overflying; and others. You can see the large reductions in sales costs and passenger costs and AMO costs as a consequence of the reduction in flying, leading to an overall $2.3 billion reduction in operating performance.
The narrative is similar as we move from the group to the key operating entities, we see a drastic drop in the amounts of flying across all 3 airlines causing a collapse in revenues. Expenditure was also cut significantly, but fixed costs mean that cost reduction was less than the revenue reduction. And this applies to SIA Engineering company also, whose revenues are largely tied to the amount of flying by its airline customers.
Moving to Slide 14. Take a look at the group's net loss for the first half. I'm sure you will agree that this $3.5 billion net loss is very sobering. And the swing from net profit to net loss will be explained on Slide 15. The net loss in the first half was due largely to the weaker operating performance. But the group also recorded impairment charges totaling $1.7 billion, the largest of these related to surplus aircraft. The overall impairment of aircraft were taken in 2 parts. In the first quarter, we announced that we would take an impairment of 7 aircraft that were returned from NokScoot where they -- to which they had been leased, but they will no longer fly for SIA. And the balance, $1.33 billion relates to surplus aircraft identified during the fleet and network review. Impairments of the goodwill recorded when the group gained control of Tiger Airways in 2014, as I noted earlier. Incurred rationalization costs in connection with manpower, which were announced just a month or 2 ago.
SIA Engineering company impaired its hangars and other base maintenance assets. And we had a small increase in our net finance charges, one of which was partially offset primarily from tax credit and against tax expense last year. And that's the waterfall chart.
My final slide shows the group per share data. I don't think I will linger on this slide, which simply reflects the losses recorded during the first half.
I'm very happy to hand over to Goh Choon Phong, our CEO. Thank you very much.
Thank you, Stephen, and good morning, ladies and gentlemen. Welcome to our virtual media and analyst briefing. I'll take through the -- I'll talk through 4 points, 4 key topics in today's briefing.
Firstly, financial position. I believe few argue or few will disagree that liquidity is today one of the most important survival factors for businesses and especially for airlines. And in this area, SIA Group has raised $8.8 billion from our shareholders through rights and rights MCBs issuance. We've raised an additional $2 billion to secure financing of our aircraft, and we have increased our committed lines of credit by another $500 million. Altogether, in the last 6 months or so, we have raised an additional $11.3 billion in liquidity for the group. And to bear in mind that this is on top of the $1.7 billion in committed lines of credit that was pre-existing before the COVID crisis. And the 11 -- the $1.7 billion pre-existing lines of credit is largely unutilized at this moment. But we are not stopping here.
We are increasing our efforts to look at more sources of raising liquidity. We have entered into discussion, in fact, at the advanced stage to do more sales and leaseback transactions. We are also looking at tapping the debt equity market or rather the debt capital market. And with all this, we are confident that we will have very strong liquidity, and that we believe that we have one of the strongest, if not the strongest liquidity position among airlines. Of course, it's not just about raising liquidity, it's also about cost management. And Stephen have earlier mentioned about some of them. I just want to touch on 2 of them.
One is the painful exercise that we have to go through in September. And in that exercise, we have to cut to a tune of 4,300 positions from the group and release 2,000 of our staff from employment. We are -- we have completed our negotiation with Airbus. We are at an advanced stage of negotiation and discussion with Boeing. I believe we are making good progress in those areas. And in part, we're able to make those progress because we have strong liquidity to ensure that survival. So our partners are aware of that. And we have started those negotiations very early, in fact, as far back as in February. But we're not just talking about managing cost and liquidity. We are also talking about going out and trying to seize revenue opportunity -- any revenue opportunity in the market that we can pursue.
But we know that in this COVID environment, our customers are very concerned about health safety. So from the start, we pay a lot of attention on how to ensure a safe journey for our customers end-to-end from pre-flight all the way to post-flight. And some of this -- and some of the comprehensive actions and measures that we've taken on the flight. I want to highlight that because of our modern fleet philosophy, all our planes, all the planes that are operating, are equipped with to HEPA filter. And as you know, this filters off 99.97% of viruses and bacterias in the air and the air in the cabin are changed out every 2 to 3 minutes. So very clean air.
On top of that, and many of our customers have asked that question, of high-touch services, especially in the laboratory, and that's understandable concern. We want to assure everyone that we have coated all high touch services in and around our laboratory, onboard the plane, and that includes the full planes with long-lasting anti-microbial coatings, which basically will kill bacterias on surfaces and the effect will last at least for a month. The assets were put in, in ensuring a strong digital capability have also produced good results, by allowing us to very quickly introduce digital solutions to ease the travel of our customers when they fly with us. It also allows them to have contactless interaction; for example, onboard the plane, they are able to use their personal devices to control the IFE rather than having to touch the surfaces of the screen or the handset.
I think everybody will agree that Singapore is probably among the most proactive nations in the world when it comes to looking at ways to open up and reduce travel restrictions in a phased manner for our customers. I believe everybody know about the 3 schemes: the unilateral opening; reciprocal green lanes, RGL; and the latest has been the air travel bubble that we are in the process of finalizing with Hong Kong.
In particular, for the air travel bubble arrangement, this will actually facilitate and allow general travel and not just travel for essential businesses. And we believe that this will serve as a very good pilot, an example, of how we can actually open up travel in a safe manner for everyone. Of course, all these travel arrangements, travel schemes are also supported by advances in testing regimes and protocols as well as availability of different type of tests in the market. We believe that the continuous investments in all these tests schemes as well as test approaches would further ease travel going forward. For example, the breathalyzer that we're talking about has been experimented in Singapore.
As a consequence of all of these schemes that have been introduced as well as the strong demand for cargo in the [ valuable. ] We are seeing increasing demand for the flight and, therefore, our ability to step up on our capacity. We project thoroughly that our capacity will reach above 16% of pre COVID by the end of the year in December. We will continue to be very nimble and flexible to see how -- what other opportunities the market may bring. Or for that matter, any adverse environment that the market could have in the future and adjust our capacity in a nimble and flexible manner, up or down.
Cargo is a bright spot for the industry and certainly for us as well. And we have been taking proactive steps to operate, for example, passenger airlines, passenger aircraft for cargo missions. And we've gone a step further to actually convert some of the existing passenger planes by removing the seats onboard the plane. Actually, for example, for the 777-300ER, we removed the seats on this premium economy as well as economy class cabin, which will allow us to actually carry more cargo, in that case, about 9.5x more to capitalize on the demand for cargo shipment and operating this aircraft to bring us more revenue.
One of the planes operated in flying -- have restarted its operation last week, and we have said, the other plane -- the other 777-300ER, which has been converted into pseudo-freighter will start operation this week. Cargo continues to build up its capabilities in perishables and pharmaceuticals. The growth in cargo during this year is primarily stimulated because of demand for perishables as well as pharmaceutical movement as well as e-commerce for that matter. And enhancing our capabilities to carry more of such goods will allow us the ability to participate more in opportunities. Particularly, for pharmaceutical, we are all expecting vaccines to come onboard, starting perhaps next year. And our cargo division is ready to carry such shipments.
Some of the strategy we pursued even before COVID, continue to benefit us in ensuring that we have a nimble and flexible way to respond to such crisis. Our integration -- SilkAir integration back into SIA is one such initiative. So we can begin to see -- we can begin to expect SIA to operate its first narrow-body plane sometime by the first quarter of next year. And this will give us the flexibility of deploying wide-body or narrow-body operations on the route, depending on the demand in a seamless manner. Similarly, for Scoot, it will allow us to deploy the right vehicle on the right markets -- to the right markets, depending on the demand profile of that market. As you all know, we invested in Vistara in India because it allowed us to participate in the growth of another major market, which SIA cannot directly participate in.
And as you can see here, Vistara today is already operating 55% of its pre-COVID domestic capacity, and expect to reach 60% by end of the year. And by the end of March or rather April next year, Vistara is expecting to recover and operate 100% of its pre-COVID capacity, of course, subject to regulatory approval. Vistara has also grown internationally. As you can see there, London, Dubai, Dhaka, Doha. And we expect Vistara to continue to seize any opportunities in the market to grow. COVID has been difficult for airlines and especially for airlines such as SIA, because we do not have a domestic market, but even in this difficult time, we have not forgotten, and we have not let up in our engagement with key stakeholders.
We continue to participate in community projects and initiatives. Our cargo division together with Tamasek and World Food Programme has been transporting needed goods and aid to countries in need, humanitarian aids in particular. Our ambassador programs have been well reported, many of cabin crews participate in them, and we are proud to be contributing to the nation's fight against COVID-19.
And of course, we want to ensure that when our employees begin to come back to work in bigger numbers that they come back to a safe environment. Customers, the engagement of customers are very important for us. COVID, of course, means that we will not be -- we operate very few flights. And therefore, the opportunities for us to interact and engage our customers are small. Therefore, we have come up with various schemes for us to reach out and for us to still interact with our customers. I think everybody is quite aware of the Discover Your Singapore Airlines Experiences that we have been launching, all of which we see overwhelming response, and we thank all our customers and also the Singapore public for your support and also your encouraging words to our staff as when we interact with you.
But it's not just about managing the crisis itself. In parallel, we have been preparing ourselves and ensuring that we are on a strong foundation to emerge stronger and fitter from this crisis. We have not forgotten about sustainability. It is still -- it will remain an important focus for us. I just want to highlight a few of them. When you talk about sustainability for airlines, you can't run away with talking about carbon emission from operating the plane. And to be absolutely frank, the most effective way for any airline to reduce your carbon emission when you're operating your planes is to ensure that you have fuel-efficient plane. So for the same machine that we are operating, we can actually reduce the amount of emission.
And in this case, our -- as we mentioned earlier, our modern fleet philosophy allow us to keep the plane currently, a 6-year old, on average, which is less than half of what the average age of the fleet is of airlines in the world, which is more than 15 years. And our experience has been that -- especially for long-haul flight, we can achieve with these modern planes, with this modern technology engines in particular and also aircraft materials and design, we're able to have a fuel efficiency of more than or close to 30%, which will give us a substantial savings in terms of carbon emission. We reported also that we will be implementing and installing solar panels on our buildings. I'm glad to say that those installations have been done. And we are with those installation, having savings of 2,300 tons of carbon emissions per year.
In flight, we have not forgotten to see what else you can do. So in this case, we are launching a new dining concept by the end of this year for economy class passengers in the regional flight. Where the -- instead of using the traditional containers we will be using paper boxes as well as bamboo cutleries. And those can actually be incinerated -- not incinerated, those actually be converted into energy pellets through eco-digester and which then can be consumed for energy. So it is contributing to a circular economy. And on top of that, we are, as a result of using those containers, those paper containers as well as bamboo cutlery, able to reduce the weight that we carry onboard plane by almost 60%, which, again, contribute to lower fuel burn and a savings of more than 300 tons of carbon emission per year.
We continue to push the boundary and grow new businesses, adjacent to what we are doing. Most of them have been reported before, and you're aware, I just want to touch briefly on 3: Kris+ is an evolution from the KrisPay app that we have launched, but with more functionalities in it, we added more merchant relationships. We have also put in the boarding pass privileges and improve the user interface.
Pelago is a brand-new business unit that's been set up within SIA. It is really a trip-planning platform, so customers can go in and Pelago will help them to plan the trip. And as they interact more and personalize those trip planning, there are many interesting ideas in there, many hidden gems even for Singapore. So I urge you to go in and take a look, if any -- for anyone booking on Pelago until the end -- today until the end of November. You will be eligible for 5x the KrisFlyer points.
We announced the SIA or Singapore Airlines Academy early last week, and we are very happy that as of today, more than 50 organizations have reached out and expressed their interest to work with us. We strongly believe that SIA will be able to be much stronger and future from this crisis. We have 4 key foundations that are not common among all airlines: We have a strong and trusted brand. And we mentioned earlier about strong liquidity and, therefore, balance sheet. Our people are very committed, very passionate, talented and highly skilled. And over the last few years as a result of our previous transformation, we have established ourselves to be one of the leading digital airlines in the world.
With that, we are launching a new transformation chapter, focusing on how we can ensure that we much -- continue to be a leader in product and services, although those could be defined differently post-pandemic. We will achieve the financial sustainability needed in order for us to reward our shareholders as well as continue to reinvest for our growth and future. And of course, will continue to ensure that the SIA spirit remains high and alive, and to ensure that all our people have the necessary skill set for the future. Thank you.
Thank you, Mr. Goh. We will now move on to the question-and-answer segment. For this, Mr. Goh and Mr. Barnes will be joined by Mr. Mak Swee Wah, Executive Vice President of Operations; Executive Vice President Operations; Mr. Lee Lik Hsin, Executive Vice President Commercial; and Mr. Tan Kai Ping, Executive Vice President Finance and Strategy. We have around 30 minutes and we have many participants. As always, I would like to request that each participant limit themselves to just one question. If you could identify yourself before you ask your question, that would be very useful for us. Rishi, please could we have the first question.
The first question is from the line of Louis Chua from Crédit Suisse.
Louis from Crédit Suisse here. So my question is on the capital expenditure projections, would you be able to share with us the numbers that you last had, I think in the full year results, the projected CapEx for aircraft and others for FY '20, '21 and beyond?
Louis, this is Stephen. We certainly had anticipated and hoped that we would be able to provide an update to our capital expenditure numbers. But as I mentioned earlier, we have not quite concluded negotiations with Boeing. So that remains outstanding. And our intention would be to apprise the market at the right time but we are not yet ready to disclose where we have got to.
[Operator Instructions] The next one is from Chen Chuanren from Air Transport World.
Good morning, Chuanren from Air Transport World. You have mentioned that you are looking to increase revenue from your ancillary products such as KrisFlyer, KrisShop and even Aviation Academy. What is the ideal revenue or percentage contribution of these segments to SIA’s income in the near future?
Choon Phong here. As you are aware, we are -- these are relatively new ventures. And we're kind of in the midst of crisis, the COVID pandemic. So therefore, it's probably premature for us to provide any guidance or projections on what kind of revenue we can expect. But obviously, we think that going forward, as the market recovers and the business come back, that we will be able to look forward to at least something that is more material.
The next question is from the line of Raymond Yap from CIMB.
Okay. So my question is on the cargo space. The 2 A320ceos that had their seats taken out, when did they actually start flying? I'm not sure whether you mentioned it just now, I may have missed it. And also, what's the payback period for the cost of actually removing the seats and then later putting seats back on and whether there's a cargo uptake in the fourth quarter as is usual?
The A320s were done quite some time that. They were the first to experiment with this modality, whereas the 777s were more recent. In terms of payback, for both of the aircraft types of the cost of picking up and putting back the seats later is all expected to be within a very short time frame within a period of a year. And that's why we are so confident to go ahead with it. To the final question of the uptake in the year end cargo, the peak period, yes, we continue to see growing demand, and we expect that to be a peak season for the year-end.
[Operator Instructions] And the next question is from Adrian Schofield from Aviation Week.
This is Adrian here from Aviation Week. Just have a 2-part question, if I may. How are you planning your connecting banks differently due to the severe reduction in flights and city pairs, and also, how do you think the role of connecting hubs will change in the immediate post-COVID environment?
This is Lik Hsin again. So obviously, we would not be able to have a similar complexity of connecting banks that we had pre-COVID given the big reduction in services. But we have made sure that the key connecting corridors are able to flow through the passengers and we have made provisions for that in our network planning. To the second question of hub development in the future, we believe certainly that hub activity will still be important and that is a cornerstone of our strategy, and we would want to remain one of the pre-eminent hubs in the world for global travel.
The next question is from Ian Wong from UBS.
Can you guys hear me?
Yes.
Yes.
Two questions, if I may. Given the about $1.3 billion impairment losses being recognized, for the 26 older aircraft, is it safe to say that that's just probably it for the near-term in terms of impairment of the aircraft? And secondly, if I may, can I please get an update on the cash burn rate at the moment, given the outlook of a 16% capacity of pre-COVID levels by December?
Thank you for your question. This is Kai Ping. The impairment of $1.3 billion in respect of 26 older-generation aircraft was a result of the network and fleet review as we looked at the trajectory post-COVID-19. So that is our best view of the world right now.
Yes. On the -- on cash burn, it has reduced compared with the first quarter. We are currently seeing below $300 million cash burn on a monthly basis.
The next question is from Tan Gek Leng, from Shin Min Daily News.
This is Gek Leng from Shin Min. I would like to ask, because the Discover Your SIA, especially the Restaurant A380 and the Inside SIA, has been very popular. Is there any decision to make it a more constant offering, or a more regular offering?
As you know -- this is Lik Hsin again. As you know, we recently concluded our restaurant at A380 series and we are now putting all of our efforts into the next series of activities, which is the Inside SIA experience, an inside look at our training center. I think at this time, we would want to concentrate on making that as big of a success as our Restaurant A380, before we make any further considerations.
Next question is from Brendan Sobie from Sobie Aviation.
I have a question about the ULRs and the future of the ULRs. Has there been any review of those and any decision on whether you are going to keep all 7 or maybe convert some of them to non-ULRs. This takes into account obviously the US market is going to be a bit slow in coming back, the presumed segment which these aircraft are very heavy on, it is going to be slower to recover and also the fact that there's improvements to the non-ULR maximum payload and your experience with the non-ULR on the LAX since April 7. Keeping all those in mind, just wondering what your thoughts are on the ULRs going forward.
Choon Phong here. The simple answer to your question is ‘no’. There is, at this point in time, no decision on the ULRs. We are, at this point in time, still keeping those ULRs and we look to be able to deploy them when the opportunity comes.
Next question is from Tang See Kit from CNA Digital.
So I have one on the company’s ability to continue raising liquidity. I know you said that you are exploring various options, but I was wondering how feasible are they in terms of these options actually materializing and big enough to support the company’s expenses given how air travel limits will likely remain in place for some time? Or does the company see the need to ask the government for financial support at some point?
Thank you for the question. This is Kai Ping. Stephen mentioned that we are exploring the sale and leaseback market -- Sorry, Choon Phong mentioned we are exploring the sale and leaseback market and debt capital markets. Both are at a very advanced stage, so we are confident of the access to those markets and the liquidity.
Next question is from Ajith from UOB.
I just got one question. This is regarding the potential cargo -- conversion of passenger aircraft to cargo. You have outlined 2 777-300s, but you have quite a number of 777-300ERs and even A380s in your fleet. So what is the scope for converting some of these aircraft to cargo i.e., by removing the passenger seats?
Yes, this is Lik Hsin. We normally would enter into this conversion only when we have secured the business, or are very confident of the business, on a particular route, which is what we did in the case of all of the aircraft that have been shown to be converted. So we will continue to explore with our business partners, with the freight forwarders, on whether there are additional such routes, which can take the operating cost of that conversion, where we will make a positive business case for us.
Certainly. Next question is from Shaurya Visen from Goldman Sachs.
Shaurya from Goldman Sachs. Thank you for taking my questions. So, I have 2 quick ones for you. It is on financing basically. So can you let us know on the MCBs. What is it that you were looking for when you decide to raise them? Is it like a certain net debt-to-equity ratio that you are looking for or some other metrics before you raise further capital there? And secondly, you mentioned some other sources of financing. Are you also looking to sort of monetize your card business, like KrisFlyer or something which the US airlines have done? Any chance you can give us like a ballpark as to what your internal estimate of the value of that KrisFlyer business is?
Thank you for the question. This is Kai Ping. I do not think we are ready to discuss the financing plans further than what we have spoken about at this briefing. So I think the course of the recovery and the pandemic is really still full of uncertainties, and what we are doing right now is making sure that we are proactive and ready to seize all opportunities and be in the position to seize on the opportunity to recover.
Next question is from Mayuko Tani from Nikkei.
About the surplus aircraft, you have said that this is -- so far, this is it. But may I know what's going to happen to those aircraft? How does the aircraft market look like when -- how long it's going to take if you -- to sell? And with the negotiation with Airbus and Boeing, Airbus has concluded and Boeing at an advance stage, what's the number of the fleet that we can expect at the end of the year and at the end -- in 2021.
The aircraft that have been impaired, 26 aircraft have been impaired, so a lot of them actually already due at some stage in the near future to leave the fleet. So the reason why we are impairing them is because we do not see them taking to the sky. These are the least efficient aircraft, if you like -- if you stack them up. We don’t see them taking to the skies again. Therefore, we have taken the impairment. In respect of the A380s, the 7 that we have impaired, they have reached basically certain maintenance windows -- heavy maintenance windows, that would make sense for us to ground them and take them out service rather than spend more money on them because we also do not see them taking to the skies again. So that is how we came around to those 26 airplanes. And they will basically be disposed through the most economic means.
Yes. Okay. Your other questions on Boeing. We -- as what Stephen said, we will -- when we have completed the negotiation, be able to share more.
Next question is from Kaseedit from Citibank.
Just very 1 quick follow-up questions on the CapEx and aircraft plan. I appreciate that you cannot disclose too much at this point in time. Can you reconfirm that it's purely deferral and there's no cancellation?
I think we are not ready to disclose at this point because negotiation is at advanced stage. So it is not in our interest for us to talk about it at this point until it is concluded.
Next question is from Pang Kia Nian from Lianhe Zaobao.
I am Kia Nian from Zaobao. You have the option to exercise the MCB to raise another $6.2 billion. May I know when you will exercise this option? Would that be sufficient for the next 12 months or you have to complement it with other options like tapping on the debt market?
Hi, this is Kai Ping. No decision has been made yet on the $6.2 billion of additional MCBs, but it is available for us to call upon if necessary up to the next Annual General Meeting. At the same time, we are taking a proactive posture in respect of liquidity as I mentioned before.
Next question is from Lorraine Tan from Morningstar.
Just a follow-up on the CapEx. Your first half CapEx is significantly below that of the first half of the year ago. Just wondering whether we can use this figure to represent what it might be in the second half, pending your negotiations with the aircraft makers. Thanks.
I think you should just for when we conclude the discussion, and we will disclose what the CapEx profile is to the market.
Sorry, can I just ask, so what were the drivers for the -- what were the main things that were spent on in the first half then?
By value, the largest expenditure is certainly still the aircraft. I mean, by a long way. Really all of the other projects that could be stopped, were stopped. So, it is really dominated by aircraft purchases and certain amount of capitalize maintenance expenditure as well.
Next question please?
Next question is from the line of Tay Peck Gek from the Business Times.
This is Peck Gek from the Business Times. Given your current liquidity, how long do you think you will last?
Okay. Sorry. So we currently expect that we will need to make a decision relating -- it's really tied to the question of the MCB position. So currently expect that we'll need to make a decision relating to the MCB towards the end of the first quarter, calendar quarter. So, I think that is really the indicator in terms of the expected liquidity.
I think -- it's Choon Phong here. As you know, the market is very dynamic at the moment. Can you hear us? Because there's a lot of echo.
Yes, I can hear. Yes. Can you hear?
Yes, we can hear you. Yes, because on our side, there seems to be a lot of echo. Anyways, yes, no problem. Really, the key is, as I was mentioning in my presentation earlier, the market is going to change. The market is going to have -- because the testing regimes and protocol that we put in could be further improved as new tests available, and that could stimulate the market. On the other hand, as you can see over the world, that there are also possibilities of resurgence, second wave, third wave and all that. So, there are all kinds of dynamics and we just have to be very nimble and flexible in responding to it. And how that response and how the market evolves would obviously also affect our operations and our cash flow. There are just too many variables at this point in time to do any meaningful projections.
Rishi, next question, please. But if we could ask the participants to put themselves on mute after they've asked the question so that we prevent an echo, thank you. Sorry and if I may, we just have probably time for another three more questions. So the next three, please.
Next question is from Paul Yong from DBS.
Can you hear me?
Yes.
You've guided that we expect to be at about 16% of pre-COVID capacity by the end of the year. Could you provide a little bit more color on the longer term, like you know, where do you think we could be by the middle of next year? Of course, I understand it is very dynamic, but -- could you share with us, for example, what is underpinning your sort of assumptions, for example, the ineffective fuel hedging going forward. Thanks.
Sorry, what -- can you repeat your question?
So where do you expect your capacity to be, by say, the middle of next year or any guidance on where you expect capacity restorations be like beyond the end of this year?
So I think that we are -- as pointed out by our CEO, there are many variables in the market, both positive as well as potentially negative in terms of testing, in terms of resurgence. So it would be premature for us to talk about next year. We are, as you note, increasing our capacity towards the end of the year from where we are today. That is because we do believe that some of the things we have mentioned – the various opening of the green lanes and potential air travel bubbles and improvements in testing technology, all these we do believe have a positive effect and that's why we have increased the capacity. But too early to talk about what it is going to be like next year.
But what -- sorry, just to follow up, what is underpinning the fuel hedging ineffectiveness charge? Like, we have to assume a certain capacity beyond December in order to take that S$560 million charge for the surcharge.
Okay, so by way of guidance, we assumed recovery in capacity takes us to close to 50% by the end of calendar 2021.
I just want to add that, of course, as you correctly pointed out, in order to arrive at the number for fuel hedging effectiveness, we need to have some underlying assumptions. But that is not to say that that is the way we will operate because of how dynamic the situation is out there. You can be rest assured that we will seize all opportunities of course, but we got to be very nimble.
The next question is from Gregory Waldron from FlightGlobal.
Like, can you hear me?
Yes, we can. Go ahead, Greg.
Right. I would like to ask about the Hong Kong travel bubble. Has any thought been given to the aircraft that will be deployed in that bubble? And is there any thought to perhaps putting the A380 onto that route when the bubble opens?
Yes, this is Lik Hsin. We are obviously very keen to make the bubble a success. Of course, we do have to take into account the various considerations that the Government, the regulator, will have in approving such a bubble. And being experimental, we can expect some level of conservatism. So I think the ability to put our biggest passenger aircraft onto that bubble route, I think you can be sure that that will not be the case. We will be using one of our smaller aircraft. Thank you.
The last question is from the line of Chu Peng, from OCBC.
I understand that cash burn is $300 million on a monthly basis now. May I know the level before COVID-19, and are we expecting further reduction on cash burn?
Sorry can you repeat your question. We didn't quite hear it.
Okay. So the cash burn is $300 million on a monthly basis. May I know what's the level before COVID-19? And are we expecting for the reduction on cash burn?
We were profitable before COVID-19, so it was positive cash Generation. So would you like to clarify your question?
Just now, I think, it was mentioned that the cash burn is $300 million now on a monthly basis, so I was just wondering what's the level before COVID-19, the cash burn level? Also, are we expecting further reduction on cash burn?
Sorry, apologies for wanting to make sure we have the question correct. Our operating cash position pre-COVID was that we were in positive territory. We had surpluses. But in this first quarter, we actually provided some updates, or in August I think, as to where we were. But sort of those in the May, June, July period, our cash burn was in the region of $350 million dollars monthly and the indication that we gave most recently is that our cash burn is $300 million and reducing.
Thank you, Stephen. And thank you, everyone. We have now come to the end of our media and analyst briefing. We hope to see everyone in person at our full year briefing, hopefully, if things get better. Well, with that, I'd like to thank our participants. Have a good day, everyone, and a good week and good luck. Stay safe. Thank you.