Distress call: Why lower oil prices can’t rescue struggling SIA

Overcapacity remains the main overhang.

Lower oil prices might not be able to save SIA’s struggling bottom line in the upcoming quarters. Analysts note that while the national carrier could get substantial savings from lower oil prices, regional overcapacity remains the main overhang on its operations.

According to OCBC, intense competition will keep SIA’s margins under pressure while demand is likely to remain muted in Southeast Asia.

“Although we expect to see lower oil prices to improve profitability in 3QFY15, we think the extent on savings will be limited as SIA is already 65.3% hedged for 2HFY15,” stated OCBC.

Meanwhile, CIMB warns that SIA’s weakness will continue due to a confluence of factors, such as the weak rupiah which will crimp travel demand in Indonesia, the rapid expansion of low-cost carriers in other ASEAN markets, and the expansion of the Middle East hubs at the expense of the Singapore hub.

“The saving grace is lower jet fuel price. The SIA group of airlines consume ~37m barrels of jet fuel annually, and a US$25/barrel reduction will contribute more than S$1.2bn in cost reduction, substantial against our FY03/16 core net profit forecast of S$601m. The question is whether competitors will price down as oil prices fall. Another saving grace is political calm returning to Thailand, and Chinese discretionary travel to ASEAN eventually coming back,” noted CIMB.