Is turbulence on the horizon for SIA’s margins?

Yields have been on a downtrend.

It’s smooth sailing ahead for Singapore Airlines (SIA), as analysts believe that the company remains on the upcycle as it earnings and margins are still in the midst of reaching maturity.

According to a report by BNP Paribas, SIA is poised to rake in the big bucks as its fuel hedging losses are on a downtrend as well.

Based on BNP Paribas’ proprietary fuel hedging model, net fuel costs after hedging will estimably fall $1.1b in FY3/17, based on a jet fuel price of US$50/bbl, similar to current levels.

On the revenue end, the report does not consider the recent yield pullback as demand deterioration since load factors are up YoY. Rather, the drop is more likely a partial passing on of fuel-cost savings to consumers.

In this regard, SIA is well-placed as it is not required to slash its fuel surcharges completely, unlike several competitors. Further, the report does not SIA lowering surcharges in the near term, as it is still hedged at US$87/bbl for Q1.

Fortunately for SIA, this translates to more cost savings. Even after factoring in a further 2% pullback in yield, the report sees earnings growth of up to 24% in FY3/17, propelled by reduced fuel expenses.