Published February 3, 2009

Airline stocks flying into more turbulence

By VEN SREENIVASAN

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THE value of airline stocks has halved in the past year as the industry grappled with its worst slump in five years.

Tough year: Though better off than its peers, SIA's shares yesterday ended 23% down over the past 12 months

And with demand continuing to slide amid the economic downturn, there seems little hope of near- term recovery. The Bloomberg global airline index was down 9 per cent in January.

Singapore Airlines - widely regarded as the world's strongest in balance-sheet terms - has fared somewhat better than most of its peers. Its shares closed at S$11.04 yesterday, down 22.5 per cent over the past year. Qantas, on the other hand, has plunged 52 per cent, while Cathay Pacific is down 53 per cent.

Even after such falls, few are talking of a rebound - such is the gloom that continues to hang over the industry.

It has just been a torrent of negative news. According to data from the International Air Transport Association (Iata), whose member airlines account for more than 90 per cent of scheduled flights, the industry's net loss in the October-December 2008 quarter was US$800 million. Having already lost some US$4 billion during the first three quarters, Iata members seem well on track for a combined full-year loss of US$5 billion.

This is despite soft fuel prices. The spot price of jet fuel remains steady around US$60 a barrel, though the futures markets are currently betting the spot price will be US$12 a barrel higher in 12 months' time. Meanwhile, the so-called 'crack spread' between oil and fuel has widened to 40-50 per cent, up from the usual 25 per cent.

But the thorniest problem for airlines right now is freight; volumes plummeted 22.6 per cent in December as companies worldwide de- stocked inventory, cutting output and shipments.

Exports of goods fell 20-30 per cent in the US, Asia and Europe, biting deeply into the air freight business. Singapore Airlines Cargo, which lost about S$70 million in the six months to Sept 30, 2008, has asked its pilots to consider no-pay leave and has grounded one of its 13 freighters.

The passenger side for most airlines has not fared much better. Passenger travel weakened 4.6 per cent year-on-year in December (traditionally a high season) and looks set to weaken further in the coming months.

For top carriers like SIA and Cathay, an additional worry is the sharp fall in premium seat demand. Premium ticket sales fell a hefty 11.5 per cent year-on-year in November 2008, after a 6.9 per cent drop the month before.

The December figures will be out soon.

Although airlines have scrambled to cut capacity, the cuts so far amount to 1.5 per cent of capacity - far short of the drop in demand. The result has been a slump in load factors.

In December, average load factors on international markets were down 2.4 percentage points from a year earlier.

Surprisingly, a surge in decommissioning and parking older aircraft in September-November 2008 slowed down in December. Iata said seven planes were taken out of storage and returned to service that month, probably due to falling fuel prices. But filling them with passengers could be a challenge, it added.

Another surprise is that more than 130 aircraft were delivered in December - a reversal of an earlier slowdown.

This was partly due to the end of a machinists strike at Boeing that affected deliveries in September.

But again, filling these planes could be a problem. Passenger traffic is expected to fall 3 per cent worldwide this year and cargo could fall 5 per cent, according to Iata.

For airline stocks, it's certainly more turbulence ahead.