Four bad wolves: Find out what can drag down SIA’s profit potential in 2015

As oil prices continue their downtrend.

Singapore Airlines’ profitability could improve in the long-term amid the slide in oil prices, since jet fuel makes up 40% of SIA’s total operating expenses.

However, analysts at OCBC believe there are several factors at work that negate partly the positive impact:
1) SIA has always hedged large proportion of each year’s jet fuel needs ahead and the resultant hedging losses offset savings from lower jet fuel costs, 2) yields are likely to be depressed due to overcapacity issues as we continue to see large deliveries of new aircraft due in 2015 for Asia Pacific region, 3) SIA is likely to pass on the savings to consumers through lower fuel surcharges in order to remain competitive in the region, and lastly 4) SIA will record in its books a larger share (from 40% to 55%) of Tigerair’s expected losses for the next few quarters.

OCBC adds that with 65% of SIA’s 2HFY15 fuel needs already hedged as at end 1HFY15, the effects will be very much muted on its 2HFY15’s results. However, OCBC believes SIA will still capture the effects from FY16 onwards.