This is the secret behind SIA’s unexpectedly good Q3 numbers

Cost cutting efforts are bearing fruit.

Singapore’s flag carrier proved naysayers wrong when it reported a surprisingly strong 35.7% year-on-year net profit growth in the third quarter, despite sizable fuel hedging losses and continued pressure on passenger yield.

According to CIMB, Singapore Airlines’ good results showed that the group’s aggressive cost reduction efforts are finally taking effect, which managed to offset the drop in yields. All of the group’s airlines delivered much stronger year-on-year profits, with low-cost carrier Scoot and Tigerair rebounding after a series of losses.

CIMB noted that SIA’s unit costs dropped substantially during the quarter, on back of lower fuel prices and the delivery of fuel-efficient 738/787 planes. The report highlighted that SIA’s fuel hedges are finally dropping as it mainly hedges its jet fuel requirements over a horizon of not more than 12 months.

Despite its good results, SIA acknowledged that it will continue to experience pressure on both loads and yields. The flag carrier warned that poor oil industry outlook and investment bank retrenchments could impact business class travel demand in the immediate future.

“It is all about the tug-of-war between yields and costs, and SIA’s 3Q results suggest that cost savings are beginning to gain the upper hand,” CIMB said.

The report also urged investors not to ignore SIA’s solid growth story. CIMB remained bullish on SIA’s prospects despite jitters over the degree of yield pressure that SIA mainline would face as a result of the weak global economies, as well as from rising competition with the Gulf carriers to Europe and with North Asian carriers to the US.

“SIA’s visionary strategy of growing SilkAir and Scoot and revitalising their fleet with new aircraft will likely yield dividends for years to come. The same applies to the growing portfolio of partnerships with other airlines. SIA mainline also introduced premium economy from August, is refreshing its suite of products, while the fuel-efficient A350s will be delivered soon. Investors can rest assured that SIA is staying ahead of the game,” CIMB said.