SIA could deliver more positive surprises

THE drop in jet fuel prices is proving to be a big boost for Singapore Airlines (SIA), as it battles sliding yields amid a tough operating environment.

And with its fuel hedges - locked in above current levels - unwinding, the airline group could be poised to deliver more robust report cards.

Analysts were caught off-guard when SIA surprised with a near 36 per cent surge in Q3FY16 profit to some S$275 million. The consensus was for profits of S$224 million, according to Bloomberg.

Meanwhile, operating profit nearly doubled to S$288 million, from S$146.3 million a year ago. The stronger performance came on the back of lower expenses, as jet fuel trends at a 12-year low, and from S$53.3 million in disposal gains from the sale and leaseback of four Boeing 737s as well as the disposal of a parked B747-400 freighter.

The market reacted positively to the strong set of results, with the counter jumping 42 cents to close at S$11.24 on Friday after the group released its results on Thursday evening.

At the operating level, SIA, SilkAir, Tiger Airways and Scoot all turned in a better performance, as the plunge in fuel prices coupled with higher loads more than offset downward pressure on yields.

Scoot, which was launched in 2012, reported its maiden profit of S$18 million, versus an operating loss of S$17 million a year ago. And SilkAir's operating profit leapt 83 per cent to S$33 million.

Only SIA Cargo was the exception. Overcapacity in the cargo market depressed yields significantly - down 13.5 per cent year on year - compressing its operating profit from S$17 million a year ago to S$2 million.

Tough competition

But despite the stronger bottom line in most recently reported quarter, competition still remains a real and present danger for SIA. Rivals such as the Gulf and North Asian carriers have been aggressively expanding and adding capacity to Europe and the US. Flush with cash, Emirates, Qatar and Etihad have been investing in new aircraft and cabin products, delivering a viable alternative to SIA at lower fares.

In South-east Asia, regional wing SilkAir as well as budget carriers Scoot and Tiger face intense competition from low-cost players, which have the benefit of cheaper operating bases in Indonesia or Malaysia.

This kind of environment will continue to put pressure both on loads and yields, SIA warned.

In Q3, passenger yields at the parent airline deteriorated 4.6 per cent year on year. (One bright spot was that the decline was at a slower pace than expected by some analysts. In fact, quarter-on-quarter yields actually rose 5.8 per cent)

The airline already has the lowest revenue yield among the major carriers - down some 12 per cent in the past three years, pointed out Shukor Yusof, founder of Endau Analytics, in a report. He flagged other potential threats to margins going forward, such as a sharp spike in oil prices, further depreciation of the Singapore dollar vis-a-vis the greenback, not to mention terrorism and pandemics.

In addition, the weak outlook for the oil industry as well as retrenchments in the investment bank sector could also hit demand for business class seats in the near term - a poor prospect for SIA, which positions itself firmly on the premium end of the spectrum.

Fuel hedges

Still, SIA has been putting in place strategies - some concurrently - which are starting to take shape and will hopefully start to pay off.

The group's premium economy product will be rolled out to more destinations this year, which could bolster yields. In addition, it will soon take delivery of its first A350XWB. SIA has already announced its first two destinations for its A350 fleet, Amsterdam in April and from July, Dusseldorf.

The twin-aisle aircraft will allow it to launch new destinations with non-stop services, giving it an edge over competitors that fly via hubs in Dubai, Doha or Abu Dhabi. This move is aimed luring time-starved business travellers, who are more inclined to pay premium prices.

Meanwhile, SIA has also been successful in its bid to delist beleaguered budget carrier Tiger Airways. Last Friday, SIA announced that it had garnered valid acceptances of about 36.62 per cent for its offer of 45 cents per share, boosting its stake in Tiger to nearly 94 per cent. This means that it will be easier for the group to push for closer ties between medium/long haul budget carrier Scoot and Tiger, as well as between Tiger and the other airlines in SIA's group.

Industry observers expect an eventual merger between Tiger and Scoot, which incidentally delivered its best quarter ever thanks to lower fuel prices and its new fleet of fuel-efficient Dreamliners.

But perhaps more importantly, some analysts - such as CIMB's Raymond Yap and UOB Kay Hian's K Ajith - appear bullish that the future looks brighter for SIA as the average costs of its fuel hedges fall. This quarter, the group saw a reduction in net fuel costs of S$354 million, after accounting for a hedging loss.

About 47 per cent of the group's fuel requirement in the fourth quarter is hedged at US$90 per barrel, while jet fuel was trading at nearly half that at around US$43 on Thursday.

So while there will still be hedging losses in the near-term, these will start to lower substantially going forward. And as one analyst put it, in the tug-of-war between yields and costs, SIA's latest results suggest that cost savings are finally starting to gain the upper hand.