Passenger traffic could buoy SIA amidst soaring fuel prices

Its cargo demand is also unharmed from global trade tensions.

The growing passenger traffic could bolster Singapore Airline’s (SIA) profits amidst cost pressures mainly due to higher fuel prices, OCBC Investment Research said.

DBS Equity Research believes that all airlines globally were hit by margin pressures in H1 2018 and are eyeing to raise ticket prices and impose more aggressive fuel surcharges.

“Q1 is seasonally weak and we are expecting yield improvement to be more pronounced in the quarters ahead, hence earnings should also be stronger over the next few quarters as yields eventually improve for SIA,” DBS commented.

“For the remaining nine months of the financial year, the group has hedged 46.3% of its fuel requirements in MOPS (21.8%) and Brent (24.5%) at weighted average prices of US$65 and US$54/bbl, respectively,” OCBC said.

DBS thinks that SIA is in a better position than most airlines as it has put in longer-dated Brent hedges with maturities up to FYE March 2023, covering c. 45% of the group’s projected annual fuel consumption, at an average effective price of around US$65 per barrel for jet fuel.

“SIA’s share price could re-rate on the back of yield recovery, sustained improvement in revenues, and ongoing cost management initiatives to lower its operating costs,” DBS noted.

In addition, OCBC said that SIA could bank on its steady cargo demand despite woes from trade tensions. However, they added that the escalation of said tensions could have a longer-term impact on the air cargo demand.