By David Fickling / Bloomberg Opinion
Faced with an industry heading toward a wave of bankruptcies, an investor’s first instinct is often turning to the first three pages of the financial statements.
How much cash does the business have on hand, and what inventories and due payments can be used to meet short-term debts? What assets does it have, and how productive are they in generating earnings?
Singapore Airlines’s announcement Friday of a shock-and-awe sale of new shares and convertible bonds worth up to $10.5 billion suggests that the clues about who will survive the virus-induced crisis sweeping the airline industry are further back.
Don’t look to the balance sheet and statements of income and cashflows: The answer, as we’ve argued, is buried in the list of major shareholders that most companies include toward the end of their annual reports.
There isn’t an airline on the planet that would be able to hunker down and survive the worst-case scenario for the Covid-19 pandemic; an 18-month-plus shutdown of much of the global aviation industry.
Take one rough-and-ready measure, the cash ratio, which is the ability to pay for liabilities over the next 12 months out of cash and easily sold securities. Of the 29 largest carriers by revenue, not a single airline can boast a cash ratio higher than one, meaning they’d all run short of money before satisfying their creditors.
If less reliable short-term assets such as receivables and inventories are deployed, things improve a little, bringing Ryanair Holdings, Japan Airlines, ANA Holdings and Eva Airways above one.
Alternatively, if you can cut general operating expenses and aircraft lease liabilities by, say, 60 percent and assume that all prepaid tickets are refunded with no drain on net assets, you can add Air Canada, IAG, JetBlue Airways, Alaska Air Group, and Southwest Airlines to that group. On that sort of adjusted cash ratio, all of those carriers would have enough funds to see them through the year; but the rest of the global airline industry would go to the wall.
That’s why having a rich patron is more important than ever. In the case of Singapore Air, the key player is state-owned investment fund Temasek Holdings, which already owns 55 percent of the stock and may end up with far more if other investors don’t take up their entitlements under Friday’s cash call.
Aviation has been a cornerstone of Singapore’s national development policy since the 1970s, both through Singapore Air and another Temasek investment, Changi Airport. Economic downturns — with Singapore’s growth contracting 10.6 percent in the first quarter — are no time for governments to shirk their commitment to long-term expansion, and SIA has been at the core of that vision.
The $5.3 billion equity issue will be the largest rights offering the global airline industry has ever seen, and implies drastic dilution for existing shareholders who don’t subscribe; especially once the $9.7 billion bond tranche converts to equity 10 years from now. That prospect pushed the shares down more than 10 percent before recovering to a 3.5 percent drop midday.
Still, the amount is so gobsmacking that it should put to rest any questions about Singapore Air’s ability to weather this crisis. The $15 billion total would be sufficient to cover two years’ worth of short-term liabilities at current levels, and is roughly equivalent to its entire market capitalization before the announcement.
What does this mean for other airlines? The ones most at risk are those that neither have the relatively ample liquidity of the Japanese, North American and western European carriers mentioned above, nor the benefit of a friendly government shareholder or wealthy parent to bail them out.
As Anurag Kotoky of Bloomberg News has shown by looking at another measure of bankruptcy risk, the truly vulnerable carriers make up a surprisingly short list with surprisingly few major names.
Among the less-liquid carriers with a free float of more than 50 percent, Air France-KLM, Turk Hava Yollari, and SAS still retain government shareholdings that might be called upon to help out in a crisis; Qantas Airways and Deutsche Lufthansa have a history of state ownership which may serve the same purpose; and Korean Air Lines and Asiana Airlines have historically been indulged within South Korea’s chaebol system of conglomerates.
The three most prominent players left — major U.S. carriers Delta Air Lines, American Airlines and United Airlines — saw their shares surge this week after Congress moved through a bailout bill providing around $25 billion of support. Still, that amount would only cover about six months of liabilities, and their competitors would likely want a piece of the action too.
Three low-cost carriers — EasyJet, Norwegian Air Shuttle and SpiceJet — may also find themselves in a spot, dependent on the ability and willingness of their entrepreneurial founders to dig into their pockets if things get tight.
There will be plenty of bankruptcies in aviation over the coming year, but this industry has always lived close to the edge. Most of the biggest players have gotten where they are by working their connections to governments and wealthy patrons to backstop their commercial ambitions. If one thing survives the crisis of coronavirus, it will be the strength of nation states.
David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.