Profits fall, but airline dodges losses that were projected from fuel hedging
By VEN SREENIVASAN
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(SINGAPORE) When it comes to Singapore Airlines, analysts can often find themselves embarrassingly off the mark.
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| Top draw: The biggest challenge for the airline now is demand deterioration |
SIA once again confounded critics who had made dire predictions of massive fuel hedging losses by unveiling, instead, a $192 million fuel hedging gain for the first nine months of its financial year 2008-09.
This was despite the price of jet fuel correcting from its July 2008 peak of US$171 per barrel to US$99 per barrel in the fiscal third quarter.
'While lower fuel prices reduced expenditure on fuel by $125 million, losses in hedging amounted to $341 million,' SIA said in statement accompanying its third quarter results yesterday. 'Other cost items were well contained.'
This means a hedging gain of $533 million in the first six months, which more than offset the losses suffered in the third quarter.
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Just last week, several investment houses had predicted that the airline would record huge hedging losses. UOB KayHian put the figure at just over $2 billion for the year, based on hedged price averaging US$110 pbl.
Given the latest numbers unveiled by SIA, it would have to suffer a fourth quarter hedging loss of some $2.2 billion for the analysts to be proven right.
SIA said that for January to March 2009 quarter, it had hedged 44 per cent of its fuel requirements, or approximately 3.7 million barrels, at average jet fuel price of US$131 pbl. Given that prevailing fuel price is around US$60 pbl, this assumes a hedging loss of some US$200 million (or some S$350 million) - still a long way from $2.2 billion.
SIA uses collars, options and swaps which enable it to mitigate its hedging losses and free itself from unfavourable hedged positions. In addition, it also benefits on the lower spot fuel prices.
The airline yesterday unveiled third-quarter numbers which also beat most analysts' forecasts.
Net profit for the October-December 2008 period fell by 43 per cent to $337.2 million, from $590 million. This came on the back of a 2.8 per cent drop in topline revenue to $4.16 billion, from $4.28 billion a year earlier.
One of the main drags on profit was the loss-making cargo unit.
SIA Cargo posted a loss of $46 million during the quarter, a stark contrast to the $73 million profit it made a year earlier. Regional airline unit SilkAir posted operating profit of $12 million, some 17.2 per cent down from the same quarter a year earlier.
Operating profit for the parent airline company came to $314 million, down $199 million or 38.7 per cent from a year earlier. This would have been some $144 million higher if not for adverse forex movements - especially the depreciating Australian dollar, British pound and the euro.
The results translated into a Q3 earnings per share of 28.4 cents, compared to 49.8 cents a year earlier.
For the nine months to end-December, SIA posted net profit of $1.02 billion, compared to $1.52 billion a year earlier.
The company was sitting on cash of some $4.67 billion at end-December.
However, the airline revealed that total equity attributable to shareholders decreased by $1.67 billion, from $15.13 billion as at March 31, 2008 to $13.45 billion at end-December, due to a decrease in fair value reserve of $1.5 billion.
'The decrease in fair value reserve was mainly due to a fair value loss on outstanding fuel hedging contracts following a decline in fuel prices, partially offset by a fair value gain on outstanding foreign exchange currency hedging contracts,' it said in the statement.
SIA's jet fuel bill rose to $1.66 billion in the October-December period, from $1.33 billion a year earlier. And as the average jet fuel price for April to December 2008 increased 44.8 per cent from US$94 pbl to US$137 pbl, the airline's fuel bill rose $1.46 billion to $5.11 billion.
The biggest challenge for the airline now is demand deterioration.
A total of 4.8 million passengers flew SIA in the third quarter, a 4.2 per cent drop from last year. Passenger carriage (in revenue passenger kilometres) was 1.2 per cent down, while capacity (in available seat-kilometres) grew 2.3 per cent.
As a result, passenger load factor declined 2.8 percentage points to 78.5 per cent. The breakeven passenger load factor increased five percentage points to 72.7 per cent, as yield grew a third slower than the rise in unit cost.
SIA Cargo carried 14.2 per cent less freight (in load tonne-kilometres) than the corresponding period a year earlier.
With capacity decreasing at a slower rate (-7.5 per cent in capacity tonne-kilometres), cargo load factor fell 4.5 percentage points to 58.4 per cent. This was below the cargo breakeven load factor of 63.4 per cent, which had risen 5.5 percentage points due to rising costs and falling yield.
Looking ahead, the airline expects demand for air transportation to remain weak.
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