Is cheap jet fuel enough to lift SIA’s earnings this year?

Gulf carriers are still a key threat.

Singapore Airlines reported solid operating statistics for the first two months of the year, with overall passenger traffic growing 6.8% year-on-year in January and 8.4% year-on-year in February. However, OCBC cautions that although the strong numbers are encouraging, SIA may be sacrificing yields to ensure stable passenger loads.

OCBC noted that although cheap jet fuel will boost SIA’s earnings this year, pricing competition with Gulf carriers will eat into SIA’s yields.

“Pricing competition is likely to persist as Gulf carriers continue to expand into SIA’s key routes to Europe and the low oil price environment may exacerbate such competition since it increases the ability of airlines to price down ticket,” said OCBC.

“Being one of the key beneficiaries of cheap jet fuel, SIA is also likely able to compete on pricing through promotional activities to maintain its market share, at least on its key Europe routes. That said, we expect cheap jet fuel to more than offset the low yields in FY17. In addition, we expect profitability on both SilkAir and Scoot to improve further, and potentially even more if interlining traffic between Scoot and Tigerair can be captured effectively,” OCBC added.