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We hosted SIA at our Singapore Hospitality (Revival) Corporate Access Week this morning. Representing SIA was Mr Balagopal Kunduvara and Ms Lauren Chan.

Sales View: A generally upbeat tone. One view discussed was that recovery from here would take place in 3 slopes. The first was the incremental increase we are seeing now with expectation that this will steepen quickly going forward. The opening of VTLs could be a sign that we are at the start of the 2nd slope. Eventually, the last 15-20% towards full recovery would see a gentler slope upwards due to market segmentation and different conditions for various markets.

The question is what to do with the stock as it is undeniably expensive at current levels (see our latest views on SIA’s Insight Direct page) which is over 2SD above 5-yr mean P/B (1.2X FY23F P/B). I take a more positive view, given the momentum with the opening of VTLs is likely to increase from here. If you believe that pent up travel demand is likely to surprise on the upside, I would hold on for the ride. Not the time to turn cautious on the stock.

Some discussion points that came up during the Q and A are highlighted below.

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REOPENING

Guidance of ASK of 43% by Dec vs 34% now – steep increase expected over Oct/Nov going into year end

VLT cities are increasing quickly. 24 now, more to come

Improvement will be uneven – Europe and US being more open will be faster (seeing load factor improvements from end of summer to Oct for these regions already)

Countries like China with elimination strategy may not be as quick

VTL approach is clearly the way to go, eg Singapore – pre departure is now easier, requiring only ART test

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CARGO OUTLOOK

Load factors back to pre Covid level albeit on moderate capacity expansion

PRICING ON AIRFARE GOING UP FOR SOME ROUTES

Some routes are seeing huge increase in fares

Not true on the whole – with VTLs, bookings are heavier at front end vs economy. Some flights have capacity restrictions so could be reason for high economy fares

Function of demand and we are not at market equilibrium on the whole

OPPORTUNITIES TO GAIN MARKET SHARE AT THE EXPENSE OF OTHER AIRLINES DOWNSIZING?

No aggressive moves like M+A planned but remain open to opportunities eg launching of new routes and restarting old ones (eg Scoot to Athens/ Berlin)

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EARLY REDEMPTION OF MCB

IATA did bring forward their recovery scenario

MCB was a great deal for the company – no cash flow impact and redemption at their option

Even without Covid, some money had to be raised for capex cycle (new gen a/c) in any case

Raised as much as possible to build up liquidity

Once operating cash flow gets to pre-Covid levels, ie BAU, may consider early redemption (not a discussion for today)

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MANPOWER

Ground staff : Cut back 3900 positions (2000 staff) in Sept 2020. Able to remobilise to 100% of operation level at short notice

Pilots : Have activated 92% of pilots. All resources can be deployed if needed. Flight crew largely intact, due to Union negotiation, high pain (pay cuts) for less job cuts

Possible crunch in pilot job market (mentioned by some industry sources) will not be an issue for SIA

Cabin Crew: cut 20% of headcount (the most). 60-65% can be mobilised in a few weeks. Some recruitment will be needed to bring up to full strength.

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SUSTAINABLE AVIATION FUEL (SAF)

SIA’s view is new aircraft technology is the best way forward.

Net zero emission target by 2050. Only way to fill the gap now is by buying carbon credits (not economical)

Been working on this for some years now. Issue is limited supply. OK for test flights but many issues in using this for regular flights

ADDING NEW FLIGHTS – ARE THEY ON CASH FLOW POSITIVE BASIS?

Yes, all along (even before VTL). Incremental additions did not add to cash burn

But note that with eventual mass reopening, loads will typically lag capacity slightly as the network is rebuilt

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FRONT CABIN VS ECONOMY?

Unarguably there will be some structural change on corporate travel but not as bad as the 30-40% decline mentioned in some studies

Probably true for US domestic market vs international flights