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High Fuel Price Continues To Sway SIA’s Profitability
Corporate Digest | 18 April 2012
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By: Gerald Teo
Articles (40) Profile

Singapore Airlines (SIA) reported an increase of 6.3 percentage points in passenger load factor to 79.5 percent in March 2012, while its passenger load factor for SilkAir and cargo load factor added 0.5 percentage points each.

“South West Pacific and Europe regions led the gains as travel was boosted by the Easter holiday. Japan routes also saw strong improvement year-on-year as loads were affected by the March 2011 earthquake last year,” the company said in a statement.

Despite the improved passenger data, the situation of elevated jet fuel prices will likely remain a challenge to the airline’s operating environment. SIA added that its passenger yields are expected to come under pressure from its recent promotional fare activities.

Mixed Views From Analysts
The release of SIA’s March traffic data received mixed responses from analysts. An optimistic outlook came from J.P. Morgan which sees limited downside risk with the airline. “SIA’s passenger traffic growth in March was in line with Cathay’s but its load factors held up better for both the passenger and cargo businesses,” said J.P. Morgan, comparing SIA with its Hong Kong counterpart. J.P. Morgan reiterated its ‘Overweight’ rating with a target price of $14.

Meanwhile, UBS maintained its ‘Neutral’ call, unaffected by the airline’s latest data, with an unchanged target price of $11. “After accounting for the strong March performance, we forecast revenue to grow 6 percent, partly offset by 18 percent year-on-year rise in operating cost. We estimate a 4Q12 reported net profit of $80 million, down 53 percent year-on-year. We estimate a FY12 reported net profit of $454 million, down 58 percent year-on-year,” UBS remarked, staying on the sideline before SIA’s FY12 financial result release on 9 May.

The unfavourable sentiment came from Citigroup which believes that the March traffic data represents weak 4Q12 profits. “We expect profits to decline sharply on a quarter-on-quarter basis, with the source of earnings disappointment coming from higher jet fuel costs (around US$63 million higher, based on US$7 per barrel quarter-on-quarter increase in average jet fuel costs and 9 million barrels jet fuel volume uplift per quarter) and wider cargo losses as reflected in lower load factors,” it opined. Citigroup maintained its ‘Sell’ rating on SIA with a target price of $10.40.

Chinese Airlines Issue Profit Warnings
Elsewhere, major Chinese airlines issued profit warnings in the midst of a more subdued outlook for China in the near term. China Eastern Airlines and China Southern Airlines both warned that first quarter profits could drop by 50 percent.

“The slowdown in the growth of the demand in the civil aviation market of passenger traffic and the inadequate demand in the international cargo traffic market in the first quarter of 2012 affected the growth of the air transportation business of the company,” said China Eastern Airlines in a statement. It added that the higher price of jet fuel and a significantly lower foreign exchange gain have also impacted its bottom line.

Last month in a financial forecast, the International Air Transport Association slashed airline profits in 2012 to US$3 billion, down from the previous estimate of US$3.5 billion. It attributed the reduced profits to the sharp rise in oil and fuel prices but remarked that the downgrade would have been larger if not for the improved macro-economic conditions.

Singapore dollar-adjusted jet fuel spot price is down 2.1 percent from the beginning of the month to close at US$132.20 per barrel on 17 April.

Singapore Airlines  9.070 -0.10 -1.09%   
Business: Co provides air transportation services to destinations spanning a network spread over 6 continents. [FY19 Turnover] SIA (80%), Budget Aviation (10.5%), SilkAir (6.2%), SIAEC (3.1%), others (0.2%).

Insight: May-19, FY19 revenue edged up 3.3% to $16.3b. Pass... Read More


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