Singapore Airlines to surprise industry with 44% profit jump

Thanks to lower jet fuel prices.

According to UOB Kay Hian, despite improving traffic numbers, we believe SIA continues to be vulnerable due to Singapore’s liberal air policy and will continue to face substantial challenges from Middle Eastern carriers.

For example, Emirates has started flying the A380 to Singapore with the rights to fly to Australia.

"Core net profit is expected to rise 44% yoy in FY14 on lower jet fuel prices (FY14 estimate: US$127 including hedges), as well as improved earnings from
SIA Engineering (SIAEC). Maintain SELL but we raise our target price to S$10.70 from S$10.00, valuing the airline at an implied P/B of 0.75x excluding SIAEC," UOB further said in its report.

Here's more from UOB Kay Hian:

Jet fuel forward contracts show backwardation implying that fuel costs will be benign at least for 1Q13. We are also encouraged by signs of weaker jet crack. Much of the strength in jet fuel for 2012 was due to firm jet crack rather than crude prices, as refinery outages cut capacity.

Recent data suggest this could be reversing, due in part to higher production. Chinese jet fuel production and exports, for example, have been rising and this
should lead to lower domestic jet fuel prices, which should benfit Chinese airlines.

Also, Chinese airlines do not hedge jet fuel requirements and thus will benefit from weaker spot price. Similarly, Garuda Indonesia could benefit due to limited hedges.