Singapore Airlines Limited (C6L) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. And welcome to Singapore Airlines analyst and media briefing for the full year ended March 31, 2020. [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, Siva Govindasamy. Thank you. Please go ahead.

Thank you, Rishi. Good morning, everyone. Welcome to the Singapore Airlines full year media and analyst briefing. I'm Siva from the SIA Public Affairs department. I hope everyone is safe and healthy. This morning, we have organized a virtual briefing due to the COVID-19 outbreak. And let's hope that this passes quickly, and we can see each other in person for the next session. We will have 2 presentations today. First, SVP Finance, Mr. Stephen Barnes, will present the SIA results for the fiscal year the 31st March 2020. Next, SIA's CEO, Mr. Goh Choon Phong, will take us through the strategy and outlook for the year. This will be followed by a question-and-answer session. So without further ado, I would like to invite Mr. Barnes to make his presentation. Mr. Barnes, please.

Thank you, Siva. Good morning, CEO, EVPs, ladies and gentlemen. Thank you very much for joining us. I will dive straight into the group's financial results as to the key takeaways slide. The first slide of this slide really summarizes what has dominated SIA Group's financial results in financial year '19/'20. Notwithstanding the good progress and results we have recorded in the 9 months to December 2019. The collapse in demand for air travel due to the COVID-19 pandemic starting in late January, coupled with the unforeseeable collapse in oil prices amid a supply drop, are the 2 themes to which we will be returning to this morning. So turning to the P&L on the next slide. These 2 themes drove the more than $1 billion reduction in the group's operating results in Q4, which ended with an operating loss of $802 million and a net loss of $732 million. For the full year, the group recorded a small operating profit of $59 million, thanks to the strong performance in the first 9 months of the year. However, at the bottom line, we recorded SIA Group's first annual net loss in its history of $212 million. For those with sharp eyes and a good memory, there is an additional line item in this representation of the P&L, fuel hedging ineffectiveness. I will come back to this, but note for now that the size of this charge is $710 million. Group revenue. In the first 9 months, group's revenue grew by over $500 million. But in the fourth quarter, it collapsed by nearly $900 million or 22% compared with the prior year. The pie chart on the next slide describes some of the components. So the revenue decline of $347 million for the year was attributable to, first, lower passenger flown revenue, demand for air travel collapsed with the closure of international borders and, over time, the overall revenue improvement of $239 million achieved by the group in the first 9 months. Second, lower cargo flown revenue. And this was driven by poor loads carried and yields, primarily in the first 9 months of the year. Cargo has faced multiple challenges for most of the year with the U.S.-China trade conflict, export manufacturing slowdown in Europe and Asia and industry overcapacity on several key trade lanes. But downward pressure on yields in the first 9 months was reversed in the fourth quarter when yield was given a boost by an industry-wide bellyhold capacity crunch and a spike in demand for transportation of essential medical supplies and other products. So in the fourth quarter, the revenue decline was gentler, just $19 million, when compared to the steep decline in the first 9 months. Third, lower engineering services revenue. This was mainly attributable to lower airframe and line maintenance revenue resulting from flight cancellations amidst the COVID-19 outbreak, but also the divestment of aircraft maintenance services in Australia last year. Higher other revenue was mainly due to, first, an increase in merchandise sales through KrisShop; and secondly, compensation received by the parent airline from various suppliers. Turning to group expenditure. Group expenditure was up by $661 million for the full year. But even in the fourth quarter, expenditure rose by $162 million, the major reasons for the increase will be discussed in the following slide. First of all, fuel cost post hedging increased by $49 million. I will show you the main drivers of this in the next slide. Staff costs fell by over $250 million. This was partly to do with a lower provision for profit sharing, as you might expect. In addition, we received grants under the Singapore 2020 budget. And these items were partially offset by increases in pay and allowances due to a higher average dollar strength. Depreciation and leased aircraft charges were up by $220 million. This is really due to the group's enlarged aircraft fleet, a net increase of 7 aircraft, after accounting for the return of 16 aircraft to lessors. Other expenditure items do not need much comment, save perhaps for fuel hedging ineffectiveness. Yes, it's almost time to talk about this. After all, without this charge of $710 million, group expenditure would have reduced by $9 million. Let's go to the fuel cost. I promised to show you the composition of the fuel cost increase in the year. First of all, we benefited from lower average fuel prices before hedging. And as expected, this was offset by a worse outcome on fuel hedges as we swung from a gain to a loss. We did not consume as much fuel, and we had a small increase in cost from a stronger U.S. dollar. Turning to Slide 11. This chart shows that Q4 was a real challenge, and operating profit plunged by $1 billion to an operating loss of $802 million. On the next slide, I'll show you the main components. You can see the -- and we've talked about the reduction in passenger and cargo flown revenue. We've talked about the main cost items. But let me talk about fuel hedging ineffectiveness. What is behind the charge for this item? Fuel price has plunged towards the end of the fourth quarter as the demand for oil slumped due to the COVID-19 pandemic amidst an unexpected supply glut. This led to fuel hedging losses on contracts maturing during the quarter. And these losses have been realized, and they are captured in the net fuel cost. The ineffectiveness piece comes about from future capacity cuts. The expected capacity cuts in financial year 2021 will lead to lower fuel consumption than previously anticipated, causing the group to be in an overhedged position. This means that the hedges we had bought can no longer be tied to expected consumption. And therefore, the hedges are adrift and no longer benefit from hedge accounting treatment. As a result, the group had to revalue the surplus hedges. And because the oil price had plunged by the end of March, we recorded substantial mark-to-market or unrealized losses of $710 million on these surplus hedges. Now under financial reporting standards, these losses must be recognized in the financial year '19/'20 profit and loss account. Turning to the next slide. We'll look at the contribution of the individual entities. Focusing on the full year. Singapore Airlines revenue decreased by $132 million, as a result primarily of the lower cargo revenue, which was down by $269 million. So the lower cargo revenue was offset partially by a marginally higher passenger flown revenue plus other sources of -- increases in other sources of revenue. Expenditure was up by $565 million for the same reasons that we have identified in the group results: fuel, aircraft depreciation, fuel hedging ineffectiveness. SilkAir. Its revenue fell by $125 million. Mostly, this was from lower passenger flown revenue, but also from fewer charter flights. Expenditure, on the other hand, increased marginally just by $2 million or $3 million. But it would have been lower in the absence of SilkAir's share of fuel hedging ineffectiveness. Scoot's revenue dropped by just about $100 million, mainly from lower passenger flown revenue, but also from other sources of revenue such as lower bellyhold cargo revenue. Expenditure, on the other hand, rose by $83 million. Most of this increase was from fuel hedging ineffectiveness. SIA Engineering, as mentioned previously, had lower revenue from lower airframe and line maintenance, but a greater reduction in expenditure from lower materials, costs, production overhead and staff costs. Turning to Slide 14. This is the composition of our group net loss, lower operating profit and tax credit compared with the tax expense, higher net finance charges. Let me mention here that the -- under the leasing -- new leasing standard we adopted in the year, we now recognize interest expense arising from lease liabilities as an interest expense in finance charges. Provisions for losses in relation to NokScoot arise really from the current challenging environment that it finds itself in. On associates and joint ventures, this is primarily attributable to a weaker performance from Vistara, partially offset by Virgin Australia where losses reduced and better results from SIA Engineering's associated companies. Next slide. EBITDA per share was down 7.5%. Earnings per share, on the other hand, swung from a profit to a loss per share. The reduction in the net asset value per share arises from the net loss during the year, dividends paid during the year, and the fair value movements recorded in reserves from jet fuel hedges. The coverage ratio, really, this reflects an increase in -- sorry, the leverage chart reflects an increase in debt funding. We raised debt funding of $4 billion in relation to $5.1 billion of capital expenditure and $0.5 billion of working capital requirements. Plus, you may recall, we added $2.5 billion of lease liabilities from adoption of the leasing standard. Finally, group capital expenditure is slightly moving target at the moment. We are in negotiations with Airbus and Boeing. What is shown on the screen is our updated committed capital expenditure schedules. But please note that any agreement that we may reach with Airbus and Boeing in coming weeks and months are not reflected here. With that, I'd like to hand over to our Chief Executive Officer, Mr. Goh Choon Phong.

Thank you, Stephen. Good morning, ladies and gentlemen. Again, welcome to our first virtual briefing. I will start by catching up on Slide 20, the outline of my presentation this morning. As you can imagine, it will be centered around the COVID-19 crisis that the airline industry is currently experiencing. Impact. As all of us are well aware, the SIA Group, since its incorporation, has been having an unbroken record of profitability. And that's through crises such as SARS, 9/11, global financial crisis, et cetera. We have always been profitable. We have always operated on a very efficient, effective manner, and we've always been adapting again in the face of changes in the market. You may recall that when, about a decade ago, when we were confronted with both the challenges of LTC in the region as well as the fast-expanding Middle Eastern carriers, we came up with successful strategies to address them, such as our portfolio strategy as well as our multi-hub strategy, so we are sensitive. We always take on the challenge and move ahead. We've always been adopting a prudent liquidity strategy as well. In fact, our liquidity is in excess of $3 billion at all times. And that's, of course, in the form of both cash reserves and lines of credit. And everyone would be aware of our transformation program as well, which started about 3 years ago. We had been immensely successful, in that in the third quarter of the last financial year, the quarter October to December, we've achieved record revenue, record load factor and indeed one of the best operating profit of any quarter in our history. And here are some of the achievement, the tangible, quantifiable achievement, coming out off of the transformation program. And you can see that it touches all aspects of our business, talking, of course, to our customers, how they have appreciated the efforts and the outcome of the transformation. You can see the increase in the NPS score. The savings that we have achieved from customers in terms of the efforts to reach out and work with us on the issues. You can also see the various transformation leading to better performance in operations, better on-time performance, better productivity and also across digital capabilities. Then we have the COVID challenge. We are all well aware that it started in China, Wuhan, but it's soon spread to the rest of the world, all our major markets were affected: Europe, U.S., New Zealand, Australia, the rest of Asia. And in quick succession, we see that travel restrictions, border controls were put up. And as a result of that, global international travel collapses. And in fact, as a result of that, we had to cut our capacity towards the end of March by 96%, which is very, very drastic. But we're not alone facing these problems, as you can see, the slide on Slide 24, on the right side, you can see the other major carriers who all suffer similarly, on international -- on international routes. Of course, if they have domestic market, they would have some cushion. In our case, we are a little more vulnerable because we don't have a domestic market to depend on, which is typically the last to be closed and likely to be the first to be opened. So how have we responded? As I mentioned earlier, we have taken decisive steps to cut capacity. But I would like to perhaps also state that while we were doing that, we are conscious of the need and sensitivity around having to fulfill our customers' requirements on bringing their loved ones home safely. And in that regard, during that time, we have mounted extra charter flights to bring Singaporeans home for Wuhan. We have also kept our capacity to major educational countries where we have many of our students, so that the students can actually be brought home safely too, and that includes, for example, the U.K. and Australia. At this point in time, we maintain minimal connectivity to key countries, key cities around the world. We operate about 38 flights weekly, serving [ 15 ] cities in 14 countries. Cargo is actually a bright spot at this point in time for 2 reasons. And if you heard Stephen earlier, those reasons were given as well, but let me just reiterate them. Certainly, much of the cargo capacity of airlines in the world are actually being provided by its bellyhold, which is, of course, tied to passenger operation. The other aspect is that during this crisis, there were actually significant demand increase for the movement of particularly medical equipment as well as fresh food, so that includes PPEs. And you see that on many of the major lanes, the demand exceeds the supply. And as a result of that, we are seeing pretty good cargo demand. Of course, we will then maximize our utilization of the freighters. But beyond that, we have also been operating passenger aircraft for cargo-only missions. And in fact, we have also gotten agreement or rather approval to have cargo carry-on in the cabin itself, both the strapped to the seat as well as in overhead cabin. So that allow us to maximize our revenue opportunity when it comes to cargo, and we continue to look for opportunities to do more. Customer is always at the center of our attention. So throughout this crisis where we operated, we ensure that the customers' well-being, safety, when they travel with us, is well taken care of. We have looked into areas of pain points to resolve. For example, where the customers were having difficulty reaching us throughout our call centers or contact places. We beefed up those places with extra manpower to address them. For this reason, there were a lot of cost because of all the upheaval in the market. We continue to engage our customers through various means. At this point in time, mostly through the electronic means, updating them on what's going on with respect to our network, our operations as well as activities that take place within SIA. We recognize loyalty and we proactively offer extension of membership to our KrisFlyer members and our priority passengers. Our staff, very important part of the organization. In fact, I've always emphasized that the staff is a very strategic component of the organization. And they have been doing a lot of volunteering during this COVID period for the national efforts to combat COVID in Singapore, and we're very proud of that. I think that's well publicized, I would not need to elaborate more. But at the same time, we're also taking this opportunity to look at how to upskill our staff. Of course, many of these courses are now converted to electronic forms so that they can actually continue to educate and learn more. And that's important because they will emerge even more skilled and more capable of handling other tasks. I'm on Slide 30 now. Also to emphasize that the Singapore government has strong support for the aviation sector. This is in recognition that the aviation hub is an important enabler for the rest of the economy, especially the tourism aspect, the manufacturing, logistic aspect as well. So the Singapore government has come up with strong support packages. You can see it on the slide there about job support scheme as well as some of the cost relief on the airport operations. And both our PM and DPM have come out strongly too, and the statement you can see on the slide too. Now a very important effect of this crisis is that we are now operating at a very minimal capacity, 4%. And therefore, virtually no revenue. I mean, there's some revenue, but it's virtually not anything significant. But at the same time, we got to continue to have expenditures to keep our operating capability, which means that we're always, at this point in time, be having cash burden. So we have taken very practiced steps to try to reduce our expenditure. We have announced all of them, I mean, cutting pay for senior management and management; having various schemes of no-pay leaves available to staff; talking to suppliers and aircraft manufacturers to defer delivery and also reschedule payments; deferring all nonessential, noncritical projects; and having very high cost discipline. All of these have been done. And on top of that, we have tapped on our line of credit that we have put in place before. And we're also exploring other forms of funding, secure financing, sales and leaseback. Important to note that, that's because we have quite a bit of capacity there because we have a lot of unencumbered aircraft. Obviously, in a situation whereby we have virtually no revenue, this is not going to be enough. And that's the reason why we went on with the strong support of our majority shareholders, Temasek, to have the Rights Issue exercised. I think this has been presented. Many times, I've been communicating a lot on this. So I will not also need to elaborate on this. Suffice to say that this put us in a very strong position to prepare and capitalize on the recovery. Slide 33. I'm going to talk about the preparation that has been underway for our restart. And this is really talking about the next 6 to 12 months, what we need to put in place and what do we need to ensure that we can restart smoothly. Broadly speaking, I would have to say firstly that nobody is sure at this point in time about exactly how the recovery -- the pace of the recovery will be like. And also, what exactly are the kind of regulatory requirements the countries in the world will put in place to address the need to contain the virus. So we have actually broken down into 4 work groups to address the restart. Firstly, a group to look into and to be updated on the health and government regulations with regard to travel once the controls as well as the border controls are lifted. So this means that we have to work with both the government, the government of Singapore, and also be aware of what other governments are looking at. And some of these are actually coordinated through industry bodies such as IATA, for which we participated actively as well. We also need to look at, for the restart, what kind of travel experience should we offer to our customers knowing that coming out of COVID, there will be a lot of concern over health and well-being when you travel with us. And we've got to make sure that we address those concerns that our customers will have. That this effect of ensuring that our crew and other employees have the necessary license and certification to actually restart the operation and also working with our partners, such as our ground handling agents, the airports and others to ensure that the whole operation is smooth for our customers. Then with all that, we also need to ensure that we have very clear communication, clear and regular communication with passengers within the organization to ensure everybody is on the same page. And then, of course, there's a question of what is going to be required when we restart in terms of manpower and, therefore, the workplace arrangements. Because many of our staff are now working from home. But with the restart when we also increase our operation, we will need to have some of these staff back active on the ground. Now that is the -- that was the -- what we have to do right now to ensure that we come back and offer a smooth service experience for our customers and restore confidence in the travel. But then going ahead, we expect that a post-COVID world will be very different from what we have seen up to this point in time. So some of the factors list -- are shown on this slide, which is Slide 36. We don't know exactly how the trajectory of the recovery would look like. Is it going to be just a shape -- a U-shaped recovery? Is it going to be a W? Will there be reinfection? We don't know that. Because we don't have a domestic market, any operations we do would require the other governments to lift travel restrictions and border control. So we need to understand how that's going to be put in place. Again, there is no clear visibility on exactly how that's going to be done. You would have read that on the paper that Singapore government is exploring green lanes with some of the other countries, and we will have to keep a very close watch on the development of those discussions. Of course, beyond that, the economic activity, the return of the economic activities in the various regions and countries. Consumer behaviors are likely to change after COVID. More conscious about surfaces that people touch, more conscious about proximity. All these will form a new expectations on the travel experience, and we would have to take that into consideration on how best to address the consumer expectation, but importantly, also to bring up the fact on what can be expected in terms of what we can provide as well as what is really safe based on tax and not [ means ]. As you know, and we are doing it now, we have a virtual briefing. Much of the business activities are now taking place virtually. There's a question on how much of that will continue post-COVID. That is still also an unknown because some of the businesses are really looking forward to reestablishing a physical meeting and contact. But there is also the question of how the company policy, travel policy, might change. The aviation ecosystem as a whole would also be changing. I mean, you look at the changes that Boeing and Airbus are taking. You expect that the distribution channels and all that could be also different given that consumer might prefer more online, more virtual interaction. The way cargo handlers - well not cargo but baggage attenders, the way ground handling is going to be done, the way check-ins are going to be done could be also different. And all of these are going to change ultimately how airline operates. I think it's fair to say that most in the industry expect that there will be, in the near term, there will be some decline in the demand relative to before COVID. There will be some market contraction in the near term. But there is no clear visibility on how long it takes to recover, but most industry expect it to be a few years. We believe that is a reasonable expectation. And beyond that, however, there is a general belief that there will be growth at some point. But obviously, with all these changes, we would have to change the way we operate too. And so looking beyond the immediate restart, we believe that there is an opportunity for us to look at all of these different factors and ensure that when we emerge, we're in a position of strength and the first off the block in terms of being able to lead the industry again. So for that, we have also have a separate stream that look at these longer-term changes and putting us in a position of strength as we emerge. And that is really the next phase of transformation that we're embarking on. So in the immediate couple of years, we are really looking at some of the pain points that we currently experience and pain points that we have actually identified during this COVID period that we can address right away, how to be more effective in engaging our customers, how to address some of the requirement that customer has in terms of ensuring well-being when they travel with us. Those things, we can go ahead and do. But in the medium and long term, we have to take into consideration some of the value driver changes, some of the behavioral changes, some of the business requirement changes. And to really look at -- to comprehensively look at how we are doing things now, to ensure that we are positioned for the future. We are also looking at what new business opportunities we may get into, leveraging brand and other core strengths, so that we can actually emerge stronger. Let me conclude by sort of a slide deck that summarizes what I have said earlier. Firstly, we are in a position of strength now. We have always had a strong and trusted brand. That's a given. Now with the Rights Issue, the funding exercise that we have, we now have a -- we'll now be having a strong balance sheet. In fact, I would say that because we started on addressing the liquidity issue early on, we had an early success in securing those fundings coming in at this moment. And this actually put us in probably one of the strongest balance sheets in the industry at the moment. It also -- we mentioned that we'll be looking at other avenues of raising fund to secure financing through sales and leaseback. In fact, this strong balance sheet would also put us in a strong position to actually conclude those deals, to negotiate and conclude those deals. We also have talented and committed staff. In fact, over the last 3 years of transformation, our staff have gotten used to a lot more new ways of doing things, including being much more agile. And that commitment and those skills that will be very helpful when we restart operations and also going back to the growth trajectory in the longer run. We have also established strong digital capabilities, which we believe will be a very important effect of the next phase of our transformation and also for the industry and the way we interact with our customers going into the future. As you can see, and I've stated this earlier, all these attributes put us in a very strong position to do both the restart and also to position ourselves for longer-term success. That's my last slide. Thank you very much.

Thank you, Mr. Goh. We now have approximately 35 minutes or so for our Q&A. Mr. Goh and Mr. Barnes will be joined on the line by our 3 Executive Vice Presidents. They are EVP, Operations, Mr. Mak Swee Wah; EVP, Commercial, Mr. Lee Lik Hsin; and EVP, Finance and Strategy, Mr. Tan Kai Ping. Please note that this session is being recorded, and the clip will be uploaded. Therefore, we would appreciate it if you could please identify yourself and the organization that you represent when you ask questions. We also have a lot of media and analysts on this call. Therefore, in the interest of time, we would really appreciate it if you could please limit yourself to one question, if possible. Over to you, Rishi.

[Operator Instructions] And the first question we have is from the line of Chen Chuanren from Air Transport World.

I'm Chuanren from Air Transport World. If I may, I have 2 short questions. First question is the merger between SilkAir and SQ was initially set for end 2021. Will we foresee acceleration of this plan? And the second question is, how do you balance the supply and demand between SIA and Scoot? Which segment do you expect to recover first?

Okay. The merger of SQ and SIA, we -- oh, sorry, SilkAir and SIA, we have announced a previous time line. At this point in time, we are still evaluating what the implication is for us from the COVID impact. But I think we can say that we intend to look at maintaining the time line, at least to make a time line. As you can see, if there's opportunity or valid reason to speed it up or benefit to speed it up, we will certainly look at it. On the recovery of -- whether or not the recovery for Scoot or for SIA, the main line, is going to be faster. The thing about it is, as I mentioned, our recovery depends on not merely on expectation of the traffic but also on lifting of the border control, which is certainly not within our control. And that means that we -- the important thing is for us to be very nimble in responding to how the market will develop. At this point in time, it's too early to call. But what is important is that we do have both the LTC and the full service in our portfolio, which gives us the advantage of being able to ramp quickly and effectively as we see how the market unfolds and the border controls will be relaxed.

The next question we have is from the line of Ajith from UOB.

I've got 2 quick questions. One is what do you expect in terms of capacity -- in border capacity for FY '21 if border control restrictions are lifted? That's my first question. Second follow-up question is, what would you prioritize more in terms of sale back transactions or direct sale of aircraft?

This is Lik Hsin. I will take the question on capacity. As mentioned by Choon Phong, it is clearly evolving and things happening even in the moment can change the outlook of what the capacity will be for FY '21. Safe to say that we do know that this crisis will have a significant economic impact, and that it would be realistic to expect that we will not go back to exactly the capacity that we once had prior to the crisis within a short time frame. So certainly, for the next 6 to 12 months, we will not rebound to exactly the same level that we were at. And that is our current planning horizon. --

Ajith, this is Kai Ping. Thank you for the question. I will take the question on funding. So we have disclosed that. In addition to the Rights Issue, we are concurrently looking at both the secured debt market as well as sale leaseback opportunities. All these are being looked at in parallel. Being one of these themes, you will be -- you have heard and I think you'll continue to hear is around how to maintain flexibility and how to be nimble in how we approach the COVID situation. You will be aware that all the debt markets are open. They are more limited for the aviation sector. And so with our Rights Issue and the strengthening of our balance sheet, that puts us in a much stronger position, but we are exploring all the different pockets of liquidity, different factors on liquidity in parallel.

The next question is from the line of [ Jamie Leon Freed ] from Reuters News.

My question is just about fleet. Are you considering the retirement of some or all A380s? And do you still want the 777X? Or will you consider potentially swapping that for another model?

You are talking about the fleet? So obviously, what we have done, as you are aware, in especially recent years is this very rapid replacement of our old aircraft with new aircraft, and we expect that to continue. Each aircraft in our fleet serves a purpose. A380, of course, up to this point, has been serving this strong [ then ] routes. And we will continue, like I said, the pace of recovery, the shape of recovery of this particular crisis is still uncertain. We have flexibility around our fleet. So we'll continue to look at what we need to do in terms of mapping the fleet requirements and the market outlook.

The next question is from the line of Adrian Woo from OCBC.

I just have a couple of quick questions. So the first one is, we saw your impact of the fuel hedges on the income statement as well as the balance sheet. Can you share some color on the impact on cash flow? And the second question is, in the very near term, say 6 to 12 months, do you think that air travel would actually be more expensive for the consumers in line of social distancing measures?

Okay. Thank you. I'll take -- Stephen here. I'll take the fuel hedging question. The one of the fuel hedges have a maturity, which is sort of essentially laid out at the moment. So the fuel hedges that matured in Q4 have -- and on which we suffered losses. The cash flow relating to those hedges has already been incurred. The $710 million of mark-to-market losses, as you rightly picked up, is an unrealized loss. Those contracts will mature during the course of financial year 2021. It is -- so the cash flow impact will happen as the year progresses. Now it is feasible to work with counterparties or others in the market to roll over some of those contracts, and we have done so. But we need to be wary of the commitments that we make, the practice that we enter into the contract and so on. And so we are step-by-step approaching the market when it seems to be opportune to do so. But cash flow generally is going to be spread through the year as we -- as those cash losses, unrealized losses, comes to fruition.

This is Lik Hsin. I'll take the second question. As to whether air fares will go up or go down, the price of the air ticket is really a function of demand and supply. And we will have to adapt to those curves accordingly as we get back out in the market when we restart our services. As to the question of social distancing, in particular on the aircraft, it is still not determined at this time, the efficacy of such measures. And there are many discussions ongoing between various authorities as well as about the airlines and airlines with authorities on this subject. But it is too early to make any pronouncement on this.

Next question is from the line of Toh Ting Wei from The Straits Times.

Just wanted to ask like what would the future of air travel be like for the consumer. So you touched on the prices. But we are looking at -- how are we looking at longer waiting times to check in, increased measures such as maybe the cabin crew having to wear PPE and reduced services? They are permanent or just temporary?

This is Mak Swee Wah. Yes, these are, in fact, all those things you mentioned precisely the kind of issues that we together other airlines are working with authorities and also regulators on what we call the mode of operation. Obviously, the concern now is on safety and health. And there is a few themes out there, for example wearing mask, social distancing on the ground, contactless service. So all these issues are now being examined to see how practical they are, how they can be implemented both on the ground as well as in the air. As things stand now, there are already some models out there, which requires a passenger to wear masks and there are also some guidance on the kind of in-flight service. So this is one area where you will evolve. And I wanted to say that it will not be the same as the pre-COVID situation.

The next one is from the line of Raymond Yap from CIMB.

Okay. The CapEx for FY '21 has been reduced from SGD 6 billion in the last guidance to SGD 5.3 billion. Can I ask, is there a potential to reduce this further? Or is it not possible because aircraft deliveries cannot be pushed back in the current year? And the second question is on the staff costs, which actually fell SGD 500 million between the third quarter and the fourth quarter. Did the job support scheme come into play again and contribute to some of this decline? Or is JSS only contributing from April onwards?

Okay. If I may, Stephen here. On the capital expenditure, there has been some shifting of expenditure primarily relating to significant maintenance expenditure. The material that we would -- the expenditure that we would normally capitalize because we're not flying the fleet at the same pace as previously, we no longer have to undertake some of that maintenance expenditure. So it gets deferred. As far as the outcome of the negotiations with Airbus and Boeing is concerned, so still being negotiating -- negotiated. While we hope that there is scope to improve cash flows in the current year, until we have an agreement, we choose not to actually count it as done. On the staff costs, the major impact, although the budget support relates to the period October to March, it was only announced and the cash received rather recently. And so as a consequence, we actually booked a significant portion of the benefit in -- sorry, all of benefits, I should say, in Q4 rather than in Q3 and Q4. Secondly, the adjustment to profit sharing bonus is a Q4 effect because we had been building up a provision for profit sharing bonus through December. And that required an adjustment out during Q4.

The next question is from [ Brendan Selby ] from [ Civil Aviations ].

I had a question about retrofits. With the A380, it could go either way. You can use this downtime to accelerate and complete the program or you can just delay it because maybe you think the aircraft won't be coming back into service soon. So can you tell me -- tell us if it's accelerated or slowed down or just no change? And the same thing with the 737-800s that I think that lie-flat retrofit and was going to start pretty soon. Has that accelerated or slowed down or the same? And related, I was wondering about cargo conversions. You might have noticed some airlines like Air Canada have converted some of their 777s temporarily by taking out the seats. I'm just thinking maybe especially with your 309ERs, which are still in service, but maybe you won't go back into passenger service, that there could be an opportunity to maybe quickly turn those into cargo. Just any thoughts on whether you're looking at that.

Brendan, Lik Hsin here. I will take the question on the cargo conversion. There is no quick conversion into a full freighter that's available. But we have done a few things. Firstly, we are able to, sometimes, depending on the type of cargo, carry cargo in the passenger area of the aircraft. So we already have certification approval from our regulators to do this. But the second type of measure that you might be referring to is where airlines actually strip out the seats altogether and carry more cargo on board. This is still not a full conversion to a freighter, not equivalent to that. And that is something we are exploring at this juncture, but we have not yet made a decision on actually implementing it.

So Choon Phong here. On the questions about the various retrofit programs and all that, you can imagine that all of these are actually under intense review by us. Like our practice, until we have something that we can announce, we will not be -- and as you can imagine, all these involve also discussion with the various suppliers and so forth. So until there's something concrete that we can announce, we will not be talking about it in public.

Next question Is from Louis Chua from Crédit Suisse.

I have 2 quick questions, if I may. First is in terms of the monthly cash burn based on the 96% cut in passenger capacity. Are you able to give us some guidance to that? And secondly, in terms of the -- previously, you mentioned that you are working with all your suppliers and partners to reduce costs. Can you help us to quantify the level of product reductions you have managed to get from your supplier? For example, [ you would be keeping in participating in that part of maintenance ], et cetera.

Okay. If I may, Stephen again. On the cash burn, essentially, what we are left with, when we -- with only 4% of capacity in the year, is our fixed costs. Now our fixed costs by way of guidance, will be in the region of 30%, 35% of our total cost in a normal operating environment. So from that, I think you can derive the sort of cash burn that we are looking at. And I think you'll see that, that's somewhat consistent with the operating cash flow needs that would be covered by the use of proceeds of the Rights Issue. In terms of cost reductions, there has been useful but not fundamental reductions in costs secured from our suppliers. In fairness, the entire aviation sector is under pressure. Where we have been, frankly, more successful is in adjusting the timing of payments. So scheduling of cash outflows has been shifted, and that has helped particularly in this period before proceeds of the Rights Issue have been received.

The next question is from Alfred Chua from FlightGlobal.

This is Alfred from FlightGlobal. I have a follow-up question in terms of SIA's fleet plans and fleet strategy. Will SIA be retiring any aircraft types earlier than expected? Can we get confirmation that the 777-200 fleet itself has already been, as I said, has SIA really thought for the retirement of that particular aircraft type? And also, could you give us a flavor of the engagement with the manufacturers for adjusted delivery streams? What is the time line that you're looking at in terms of potential deferments?

If I could take the third part of that question. Yes, it is the case that if we are not expecting in the next 1 to 1.5 years to recover the full service as we have pre-COVID, we will not need the same size fleet that we had. The aircraft that would therefore be just less needed will be the older aircraft, and those will be the 777 classics, the 777-200s in the fleet. So we are expecting that they will leave the fleet a little earlier, certainly by the end of this financial year. The A330s are on lease, but they too are in by schedule due to leave the fleet within the next 12 or 14 -- 12 to 14 months, and we will not be extending those aircraft, those leases. So those 2 fleets will probably be no longer flying with us in a year's time. If I could leave to Kai Ping the other question.

Yes. I'll take your question on the color on the discussion with Airbus and Boeing. These discussions are active and in progress, and it will not be fair then for me to comment on this at this time. We will disclose when there is information to disclose.

Next question is from the line of Ben Hartwright from Goldman Sachs.

This is Ben Hartwright from Goldman Sachs. If I could just follow-up on a couple of the earlier questions, actually. One is on staff costs. And Stephen, could you elaborate on the amount that we should think about in terms of the bonus adjusted -- adjustment back out in Q4? And also, what the budget support do you recognize in Q4? What was the amount there? And what should we expect going forward? And then just on the hedging losses. I was wondering if you could just give us a little bit more color on what your assumption was on FY '21 consumption when you were calculating the $700 million hedging losses in the P&L?

Ben, I'm not going to be very helpful to you. Look, we -- I can't describe to you the staff components of the reduction in our staff costs. I think that would not be something that I can disclose. In terms of continuing budget support, in that -- there is some continuing budget support through July, which has been announced. So there will be some benefits that we will receive going forward. Now in terms of the recovery of the network, we do assume that there will be some recovery of the network during the financial year. We have a very tentative profile in which we have reviewed the hedges that are effective and ineffective. We will continue to review that as we go through the year. And it is something that we will need to do to continue to establish whether or not there is a cause for further ineffectiveness or not. But that is something that we're just going to -- we will have to see as more information becomes available and greater confidence in the recovery, if any, emerges.

Next question is from the line of Mayuko Tani from Nikkei Singapore.

This is Mayuko from Nikkei. I just would like to know about the $8.8 billion Right Issue. How long will this last? I have heard you, Mr. Goh, saying that this was determined by coverage, by looking at the necessary requirement over the financial year. So is this for this financial year? And what kind of scenario is this reason? And also I'd like to hear what you think about the continuity of NokScoot for the time being.

Okay. On the issue of the -- how long the $8.8 billion will last, I believe you have read previous report whereby we have mentioned that we expect it to last much of the financial year. But I think you also bear in mind that at the same time, we are continuing with our current cost cutting measures. We will have to look at what perhaps other things we can do. But certainly, the cost measures that we have put in place, that will continue. You also are aware that we are going out to look at raising liquidity through both secured financing, sales and leaseback and other forms. As I mentioned earlier in my presentation, that is given the strength of our balance sheet with the Rights Issue, we believe we'll be in a stronger position to get those deals done. At the same time, you're also aware that we are talking to our manufacturers about this being a major part of our capital expenditure, about moving some of the capital expenditure out. All these will help to address some of the liquidity issues. And on top of that, of course, you are aware that we do have the ability to draw on the $6.2 billion of additional MCB. On the matter of NokScoot, you -- like any other carriers in the world, it is also faced with the COVID challenge. So we would just -- we are not able to comment much at this point in time. But we just have to say that this is an area we will continue to watch carefully. But it's, again, for NokScoot itself, NokScoot has -- also is owned majority shareholders and all that. This is also for NokScoot as an airline to assess this situation and how to react to it.

Next question. We'll probably have time for 1 or 2 more last questions. So next question please, Rishi.

Next question is from Shaurya Visen from Goldman Sachs.

I have a quick one. Can you just give us a sense of your cargo yield? So I'm thinking more like in March and April, what were the cargo yields looking like here, perhaps year-on-year?

Well suffice to say that we have seen a healthy improvement in our cargo yields in recent months, obviously, we can't give you the cargo yield in April. That's not a published figure at this juncture. But the fact of us operating, which we have publicized, that we've operated some flights that only carry cargo goes to show that the yields are healthy, that the carriage of the cargo alone is enough for us to justify operating those flights.

Last question is from James Teo from Bloomberg.

Thanks for giving me the opportunity to ask the questions. And one, first, I think, 2 quick ones. One is on other operating expenses. I noticed that it actually went up for the quarter despite the capacity reduction that we've seen. So maybe if you could shed some color on what are behind those and whether that is likely to persist? Is it related to more disinfection measures or health-related measures like that? And second question is on loads. And how are you seeing in terms of the load now with the severe cut of 96% capacity? Are loads holding at the 50% range? Or can you give some direction or guidance at least if not exact numbers at this point? That will be all.

I mean I could take the other operating expenses, if I could take the other operating expenses question. I think you're referring to the SGX announcement, which sees a $20 million or $22 million increase. Is that -- if that's not correct, please tell me. I think that the primary reason for this increase is actually related to KrisShop. The increase in revenue, the merchandise sale -- from merchandise sales, obviously, has a cost in sourcing the goods. That's pretty much the explanation for the increase in other operating expenses.

On the question on loads, as Choon Phong mentioned, we maintain the minimum connectivity network for a good reason to be able to continue to bring Singaporeans home. Clearly, with all of the travel restrictions in place, demand is almost nonexistent. So you would expect that our loads are far, far, far below what normal levels would look like. We would continue to publish those numbers on a monthly basis, and you can look at those numbers for updates. But very, very low at this time.

Thank you, Lik Hsin. Thank you, everyone, for your questions and for participating in this media and analyst briefing. Stay safe, stay well. Thank you again.