It’s been almost a year since Singapore Airline Limited (SGX: C6L), or SIA, announced its massive rights issue to strengthen its balance sheet.
Back then, the airline announced a cut of 96% to its capacity as the global pandemic brought air travel to its knees.
The sentiment is quite different today.
The rapid deployment of several promising vaccines has ignited optimism.
The aviation industry started to see some light at the end of the long, dark tunnel.
A wave of optimism has swept over the sector as hopes for the restart of air travel have increased.
SIA’s share price has surged by 50% since hitting a low of S$3.31 in early August last year.
The rapid recovery has left investors with a conundrum.
Or could it be time to sell the shares?
Or is there the hope of more gains in the future as the flagship carrier’s business improves?
A global resurgence in infections
Just as it seemed we had the virus tamed with the dissemination of the vaccines, the disease has, sadly, come roaring back with a vengeance.
Asia has been particularly hard-hit as India is now reporting record numbers of infections, with 295,000 infected in just 24 hours and the country’s death toll hitting 182,000.
The situation is also worsening in Thailand where 4,500 cases were reported this month alone due to partying, nightclubs and concerts.
Over in Brazil, cases have remained stubbornly high after receding from a record, but the country still has a few more months before it sees a flattening of the infection curve.
To make matters worse, several COVID-19 variants have surfaced that are reportedly spreading faster and may be resistant to certain vaccines, adding to the strain that countries are facing in tackling the pandemic.
All these factors point to the continued closure of borders until such a time when the pandemic is successfully brought under control.
A bubble of hope
Singapore, however, is hard at work finalizing details of travel bubbles in the hopes of kickstarting some level of air travel.
The aborted travel bubble between Singapore and Hong Kong last November is now being revived, with both countries in “active discussions” over when it should start, according to Transport Minister Ong Ye Kung.
Even though a mutated strain has emerged, it should not derail plans for the bubble, which is poised to begin in mid-May.
The successful travel bubble launched between Australia and New Zealand has provided hope that countries that are less affected by the pandemic or have combated it successfully can allow some semblance of air travel to resume.
Australia is reportedly eyeing Singapore to establish its next quarantine-free travel bubble.
SIA could see utilisation creep up as these travel bubbles take shape, providing some measure of relief for the airline.
Continued cash burn
The S$8.8 billion that SIA raised a year ago may soon run out.
The carrier has seen success in raising funds through a variety of methods such as selling bonds and securing aircraft financing.
It has also managed to defer capital spending of around S$4 billion.
However, these measures may not be sufficient for the airline to tide through the next 12 months as it is still burning significant amounts of cash.
With borders set to stay shut for the foreseeable future, SIA needs to tap into different sources of funding for the business to remain viable.
A plethora of fund-raising options
Fortunately, the airline is flush with options for raising money.
Aside from its bond issuance, it still has another S$6.2 million that can be raised via the issuance of its deeply unpopular Mandatory Convertible Bonds (MCB).
As its share price has appreciated significantly since its rights issue, the group can presumably tap on equity markets to raise more funds while avoiding the dilution witnessed last year.
Yet another viable option is the issuance of perpetual securities as this item is accounted for as equity on the balance sheet, thus ensuring that debt covenants are not breached.
For instance, Singtel (SGX: Z74) had recently priced its perpetual offering at 3.3% per annum as it raised S$1 billion. The issue was twice over-subscribed.
SIA could see a similarly enthusiastic response if it embarks on a similar fund-raising exercise.
Being able to raise cash cheaply is crucial as the airline attempts to cut back on its expenses in what may be a long winter.
Get Smart: The situation remains highly uncertain
The pandemic situation remains highly fluid and uncertain.
Any recovery is certain to be uneven as some countries declare victory on the virus while others are still struggling to cope.
Investors will agree that air travel is unlikely to restart in a big way anytime soon, though.
The prospect of digital vaccine passports could help more travel bubbles to be formed in Southeast Asia, though finalising the details takes time and considerable effort.
With SIA’s share pricing in some optimism, perhaps investors can consider taking some profit off the table.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
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