Jet fuel prices at a 12-month high drags on SIA’s earnings

Every US$10/bbl rise in jet fuel price will result in an erosion of S$300m to SIA’s bottomline, says MayBank.

According to Maybank KimEng, jet fuel prices are at a 12-month high at US$137/bbl. While the stronger S$ and SIA’s recent move to raise fuel surcharges may offer some respite, fuel is still a major drag on earnings.

“We anticipate that jet fuel will remain at this level or trend higher, dashing hopes for some recovery in earnings. We are factoring in jet fuel at US$135/bbl for FY Mar13 (US$128/bbl previously), which results in our FY Mar13F earnings being cut by 25% to $787.9m,” said Maybank KimEng analyst Rohan Suppiah,

MayBank nevertheless expects that SIA is well-positioned for an eventual recovery noting that the airline’s loads had already leveled off and the worst appears to be over with signs of an economic pickup.

February load factors showed that passenger loads were maintained in the high seventies. Both capacity
and traffic were up, thanks to the Singapore Airshow during the month. Cargo surprised with a pickup in both loads and traffic, but load factors remained weak, in the low sixties. SIA had cut cargo capacity by 20% since mid-February.

“In summary, the data gives us confidence that traffic has bottomed out and is well-positioned for an eventual recovery,” said Mr Ruppiah.

Scoot, SIA’s budget long-haul carrier, will begin flight operations around June. According to Mr Ruppiah, while it is difficult to see how the business can succeed when rival AirAsia X is rationalising capacity, they believe that Scoot is positioning itself for an imminent recovery in the global economy.

“Besides, there may be resident Singaporeans who are likely to embrace this model,” he added.