Published November 7, 2008

SIA lurches from oil slick to demand skid

Q2 profit down 36% as fuel costs soar; now it faces slowdown threat

By VEN SREENIVASAN
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(SINGAPORE) The world's most profitable airline chalked up one of its worst quarterly performances in five years as it was hobbled by soaring fuel costs.

Worse still, things will not get any easier as the industry plunges headlong into a demand squeeze.

Singapore Airlines' net profit for the July-September quarter fell some 36 per cent to $323.8 million, from $507.8 million a year earlier.

And the blame for this lay largely on a 54 per cent surge in the airline's fuel bill to $1.92 billion, from $1.25 billion a year earlier.

But the easing fuel prices will provide little solace, going forward, as the demand for air travel is likely to be badly hit by the global slowdown and many carriers will struggle to survive.

SIA is relatively well- placed. But the immediate outlook for the industry is bleak. For the first time since the Sars outbreak in 2003, global airline passenger traffic shrank in September, falling 2.9 per cent as the slump in demand outstripped capacity cuts.

Asia-Pacific carriers posted a 6.8 per cent drop in demand - the second-biggest after African carriers.



SIA's own Q2 bottom line would have looked even worse had not topline revenue continued to grow, albeit by a somewhat modest 11 per cent to $4.38 billion.

The results translated into a first-half profit of $682 million, a 26.8 per cent fall from the $931.9 million the group raked in during the April-September 2007 period.

Revenue for the first half grew 12 per cent to $8.5 billion, from $7.6 billion a year earlier.

With fuel price almost doubling during the six months - and hitting highs of around US$175 per barrel in June - the airline's fuel bill soared 43 per cent to some $3.45 billion at half-time. Fuel was its single biggest expense item during the half-year, accounting for 44.5 per cent of total costs.

No fuel hedging details were provided, but SIA is known to have a rigorous, but simple, 'swap' fuel hedging programme that protects half its fuel requirements for the year.

The company's sagging bottom line was also weighed down by deteriorating profit performances of its main subsidiaries.

Singapore Airport Terminal Services' earlier posted net quarterly profit of $32.4 million for its July-September second quarter, down 33.5 per cent from $48.7 million a year earlier. Half-year profit came to $66.9 million at end-September, from $96.4 million a year earlier.

SIA Engineering's second-quarter profit slipped 1.5 per cent to $73.4 million, resulting in an 8.9 per cent dip in first-half profit to $132.1 million, from $145 million a year earlier.

Meanwhile, SilkAir's operating profit for the first half fell 44.6 per cent to $5 million, while SIA Cargo dived into the red to the count of $76 million for the first half, from an operating profit of $19 million for April-September 2007.

Despite the challenging first-half operating conditions, SIA retained its rock-solid balance sheet, with total equity attributable to shareholders at $14.53 billion, no gearing, total cash holdings of some $5.1 billion, and a modern fleet whose average age is barely six years.

The company's NTA per share stood at $12.26, above its closing price of $11.40 (down 88 cents) yesterday.

SIA declared an interim dividend of 20 cents per share, or a payout of some $237 million.

Looking ahead, SIA is bracing for an increasingly challenging operating environment where travel demand is being impacted by the global economic slowdown caused by the widening credit crunch.

Instead of celebrating a nearly 50 per cent fall in fuel price, the global aviation industry now finds itself facing the prospect of parking planes as seat sales fall.

According to the International Air Transport Association, at least 30 airlines have gone belly-up in the first nine months of this year, and another 20 are on its watchlist.

SIA has cut capacity on some routes and pulled out of others, such as Singapore-Bangkok-Osaka, Singapore-Taipei-Los Angeles, and Singapore-Amritsar.

In the first half, its passenger load factor came to 77.9 per cent, versus a breakeven load factor of 72.2 per cent.

But its cargo side remains in relatively poor shape, with a breakeven load factor of 63.5 per cent, against loads which have barely gone above 62 per cent recently.

Another challenge which the airline has been grappling with recently is currency volatility, including the wild gyrations of the greenback and the Australian dollar.