Singapore Airlines commits to Vistara; says no obligation to Virgin Australia

By Lee Kah Whye
Singapore, May 4 : The raging coronavirus crisis created air pockets for Singapore Airlines (SIA), which has cast doubts about its future commitment to Virgin Australia, just ahead of its crucial meeting of Extraordinary General Meeting (EGM) for shareholders. But the carrier affirmed belief in Vistara, its joint venture with The Tata Group.
SIA, Singapore's well-regarded international airline, has not been spared the financial calamity that the COVID-19 coronavirus outbreak has inflicted on global airlines. The impact is aggravated by the fact that it has no domestic market which would be the part of the business most airlines will rely on to recover first once restrictions are lifted.
In March, it announced a financial rescue plan to raise SGD8.8 billion (USD6.2 billion) backed by its 55 per cent shareholder, Temasek Holdings, the Singapore government investment arm.
The capital raising exercise comprise a rights issue that will offer existing shareholders 1.77 billion new shares at SGD3 each based on three rights shares for every two existing shares. This will result funding proceeds of SGD5.3 billion. SIA will also raise up to SGD3.4 billion via a 10-year zero coupon mandatory convertible bond (MCB) issued on the basis of 295 rights MCB for every 100 existing shares. The MCB will be priced at SGD1 each and if not redeemed before maturity in 10 years, they will be converted to new shares based on a conversion price of SGD4.84. SIA shares closed last week at SGD6.11. At that price, the theoretical ex-rights price is SGD4.24 after taking into account dilution.
On April 30, 99.79 per cent of SIA shareholders approved the proposal at a virtual EGM held via video conferencing as Singapore is at the moment in a midst of an 8-week lockdown.
In a written response to shareholders questions ahead of the meeting published on April 29, SIA decline to discuss Virgin Australia's recent announcement on voluntary administration saying that it is too early for any further comment. SIA owns 20 per cent of Virgin Australia. It however said that it has no obligations or requirement to put in capital for Virgin Australia, that the equity investment is fully provided for in its books, and it has made no loans to the stricken Australian airline.
At the same time, it stated that Vistara, its 49 per cent owned joint venture airline with Tata, is well-positioned for recovery post COVID-19 and remains committed to support Vistara in its fleet plans.
In the last week, SIA also announced to its customers and the general public that it will continue to operate 4 per cent of its original flight schedule till the end of June, extending the suspension of most of its scheduled flight operations for another month. The SIA group is now only flying 10 aircraft out of its fleet of about 200 planes.
Up to when the crisis started, SIA was the 15th largest airline group in the world, serving around 140 destinations in more than 35 countries and territories.
It told shareholders that its focus is now on containing costs and conserving cash. They are doing this by deferring non-essential capital expenditure and working with suppliers and partners to reduce cost and to re-schedule payments. It is also negotiating with aircraft manufacturers to delay the delivery of airplanes on order.
Of the SGD8.8 billion raised, it said that SGD3.7 billion will be used for operating cash flows, SGD3.3 billion for capital expenditure including aircraft payments and SGD1.8 billion for other commitments like servicing debt and contractual payments.
It justified its plans to reach out to shareholders for funds by explaining that under the current circumstances, it would not be possible for airlines to raise a similar amount of money through traditional funding sources like secured financing, sales and leaseback transactions and through the capital debt markets.
The International Air Transport Association (IATA) in April estimated that airlines around the world will lose USD314 billion of revenue from the decline in passenger traffic in 2020 due to COVID-19, a plunge of 55 per cent compared with 2019.
Already a handful of airlines have folded or gone into administration.
Flybe, the regional British low-cost carrier founded in 1979 ran out of cash in the first week of March. It was already heavily in debt and on the brink before the coronavirus outbreak and the sudden halt in air travel put the final nail in its coffin.
Trans State Holdings, headquartered in Bridgeton, Missouri, shuttered two of its airlines in April - Trans State Airlines and Compass Airlines. Both were regional airlines in the United States. Trans State which pervious operated under the name of Resort Air had been flying for 28 years and in recent years flew under the brand United Express. Compass which had been flying since 2007 had a regional flying contract with Delta Air Lines and with American Airlines under the brand American Eagle.
The most prominent airline in Asia-Pacific to go under is Virgin Australia. 91 percent of Virgin Australia is owned by 5 partners - the Virgin group owns 10 percent, Etihad 21 percent, and SIA, Nanshan Group, HNA Group (latter two are Chinese conglomerates) each own 20 percent. The remaining 9 percent was publicly traded.
The good news for employees and creditors of Virgin Australia is that Deloitte Australia, administrators for the airline reported that they have potentially up to 20 parties interested in purchasing the troubled airline. Although the airline has nearly AUD7 billion (USD4.5 billion) of debt, administrators say they are confident of completing the sale of the airline by the end of June 2020.
(Disclaimer: The views expressed in this column are strictly those of the author)