Cargo could blunt some of the pain for SIA's Q1 earnings, but recovery remains elusive

FATTER yields in the cargo business could be a bright spot for Singapore Airlines (SIA) when it reports its first quarter update next week.

The national carrier has already flagged a material operating loss, marked-to-market losses from fuel hedges and a one-off charge totalling S$123.6 million from the liquidation of Nok Scoot.

Shukor Yusof, founder of aviation consultancy Endau Analytics, estimated the group's net loss could total S$770 million to S$800 million for the three months ended June 30, 2020.

But SIA's cargo business could blunt some of the pain. Cargo yields have been pushed north by a capacity crunch in the cargo market and a surge in demand for medical gear and equipment.

Dismal passenger traffic

At the group level, SIA carried about 38,100 passengers during the quarter under review - down from 9.4 million in the same period a year ago. In August, the parent airline and regional wing will operate just seven per cent of scheduled capacity - although this is an improvement from 4 per cent in April and May.

A Singapore-China green lane was established in June for business and essential travel, but independant analyst Brendan Sobie of Sobie Aviation said the limited number of flights between the two countries and the stringent criteria for the scheme render passenger traffic insignificant.

He doesn't expect an upcoming arrangement between Singapore and Malaysia, which kicks in from Aug 10, to have much impact on passenger numbers either.

Meanwhile, the International Air Transport Association (Iata) projects that travel demand may not recover to pre-Covid levels for three to four years.

Hedging losses

SIA is already bleeding. For the fourth quarter ended March 31, 2020, it unveiled a quarterly loss of S$732.4 million. Earnings were dragged down by S$710 million in marked-to-market losses for ineffective fuel-hedging contracts and S$198 million in fuel hedging losses. SIA also reported its first ever full year loss of S$212 million.

For Q4 ended March 31, 2020, it had hedged 79 per cent of its fuel needs at US$76 per barrel (/bbl). It had also previously announced Brent hedges with maturities extending to FY2025 at average prices ranging from US$58 to US$63 per barrel.

Fuel hedging losses will make a reappearance in Q1FY2021, as its fuel hedges are above the current spot rate.

Jet fuel ended last week at US$45/bbl, down 43 per cent year on year, according to Iata, which has forecasted an average jet fuel price of US$46/bbl for 2020. The losses are also being exacerbated by a rate of fuel consumption that is lower than what the airline had expected when the hedges were made.

Cargo climb

However, the global grounding of passenger aircraft has removed cargo capacity from the market, which in turn has pushed up cargo yields. Passenger aircraft typically carry some cargo in the bellyhold.

UOB Kay Hian transport analyst K Ajith reckons SIA's cargo earnings in Q1FY2021 could surprise on the upside. He estimates that cargo traffic was down 50 per cent in terms of tonnage during the quarter, but that yields have risen by at least 50 per cent.

With travel demand on the skids, SIA - like other airlines - has been redeploying resources to the cargo side of the business. It has dedicated 33 passenger planes from its group-wide fleet of some 200 aircraft to cargo operations, complementing its seven freighter aircraft.

SIA is only releasing a business update on July 29, and not a full set of results. But investors should look out for disclosures on how it has used the funds it raised recently as this will give a good sense of cash burn. Plane-makers Airbus and Boeing are scaling down production rates in the face of flagging demand, which could allow SIA to defer capital expenditure on outstanding aircraft orders.

SIA recently raised S$10 billion in liquidity, including S$8.8 billion from a right issue. In an announcement on June 16, it said it had used S$2.2 billion of its rights issue proceeds so far, of which S$0.2 billion went towards operating expenses and the rest towards repaying a bridging loan from DBS Bank.

The bigger concern is the slower-than-expected recovery as a second wave of Covid-19 cases has countries cautious about re-opening borders and expanding travel bubbles. Expect headwinds to continue in the coming quarters.