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SIA could be flying higher for Q2 if not for its woeful associates

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Despite the cargo market remaining in the doldrums, flagship carrier Singapore Airlines (SIA) may show improved operating profits when it releases its second-quarter results next week, uplifted by stronger passenger loads.

DESPITE the cargo market remaining in the doldrums, flagship carrier Singapore Airlines (SIA) may show improved operating profits when it releases its second-quarter results next week, uplifted by stronger passenger loads.

However, risks remain in the form of possibly poor contributions from its associates - such as Virgin Australia and India-based Vistara - which may impact the group's bottom line, analysts say.

SIA is due to release its second-quarter financial results on Nov 5.

For the second quarter, passenger load factors picked up at both the parent airline and budget carrier Scoot as traffic growth outstripped capacity injection.

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Diversionary traffic

At the parent level, the 2.7 percentage point quarter-on-quarter gain in passenger loads could have helped to boost operating profits, UOB Kay Hian analysts K Ajith and David Lee reckoned, noting that the carrier may have benefited from diversionary traffic out of Hong Kong in September as street protests intensified in the Special Administrative Region. Passenger load factor for the second quarter edged up to 85.9 per cent, which Bloomberg Intelligence analyst Chris Muckensturm pointed out was a new high.

On the other hand, losses are expected to continue at SilkAir and Scoot, although some analysts thought that better passenger loads could also help to narrow quarter-on-quarter losses as long as yields do not deteriorate.

In the previous quarter, both regional wing SilkAir and Scoot racked up losses of S$16 million and S$37 million, respectively. SilkAir was hard hit by the grounding of six of its Boeing 737 Max 8 planes in the first quarter, which led to capacity cuts, yield erosion and increased costs.

Where costs are concerned, jet fuel prices averaged US$75 per barrel for the quarter under review, but analysts are mixed over whether this will reduce operating costs given the muscular greenback as well as the fuel hedges that SIA has in place. For the second quarter of the financial year, the group has hedged 79 per cent of its fuel requirements in Singapore jet kerosene (MOPS) at a weighted average price of US$75.

For the remainder of the financial year, the group has hedged 70 per cent of its fuel requirements in MOPS and 5 per cent in Brent crude at at weighted average prices of US$76 and US$52 respectively.

Meanwhile, the global air cargo market continues to remain tepid, owing to the US-China trade war and weaker manufacturing conditions for exporters in the region. The Asia-Pacific, which accounts for over 35 per cent of global market share for air cargo, remains the main contributor to the decline.

Cargo traffic slumped 8.5 per cent year-on-year for SIA in Q2 FY20, translating to a 5.3 percentage point drop in load factor to 58.2 per cent.

Cargo aside, the bottom line could also be impacted again by associates earnings.

Losses from associates

In Q1 FY19/20, net profit fell 20.7 per cent year-on-year to S$111 million, largely on the back of higher share of losses from associated companies. Operating profit, however, was up 3.6 per cent at S$200 million.

UOB Kay Hian warned that the bottom line could be weighed down by poor associate earnings, namely loss-making Virgin Australia and Vistara - the latter having racked up a loss of some S$160 million in FY19.

Similarly, JP Morgan analysts James Teo, Karen Li and Shawn Ng estimate that SIA could incur S$50 million in share of losses from Virgin Australia in Q2 FY19/20, and S$8 million per quarter thereafter, depressing the airline's share price. Any recovery may take place only early next year.

SIA shares closed at S$9.41 on Thursday, up 17 Singapore cents.