ON FEB 2, Singapore Airlines reported lower than expected results for the nine months to Dec 31, 2011, undermined by soaring jet fuel costs, losses from its cargo business and declining returns from investments in its associates -- notably Tiger Airways.

 

During the period, SIA reported a 59% yoy decline in net profits to $374 million as fuel expenditure went up by 30% to $4.4 billion. Fuel accounted for about 40% of the carrier’s total expenses during the period. Profits were also affected by SIA Cargo’s $40 million loss in 3Q2012, the division’s largest quarterly loss this year. Global air freight volumes have been falling following the restocking of inventory by companies in 2010 and the ongoing uncertainty in the economy, resulting in a 2.5% yoy contraction in yields.

 

Meanwhile, revenues were up by 2% compared to the same period last year, hitting $11.2 billion in 3Q2012. During the April to December quarters – which are seasonally strong – SIA carried 4.4 million passengers, unchanged from the same quarter a year before, as more travellers opted to fly budget given the uncertainty in the global economy. At the same time, available seat capacity grew by 3.3%, resulting in a 2.5 percentage point decline to 77.2% in passenger load factors. The passenger breakeven load factor was up 4.9 percentage points to 76%, owing to the rising costs.

 

Can investors expect SIA to face headwinds given Europe’s unsolved debt problems and softer growth in the US and China? For its part, the carrier warns that forward bookings for the January to March quarter have so far shown signs of weakness. What’s more, prospects for the air cargo market don’t look too promising, with forward indicators such as the Purchasing Manager Index sliding further alongside weak consumer demand in major developed economies. “Passenger yields are expected to remain under pressure while cargo yields are expected to continue to decline,” SIA noted in a statement. “As the price of jet fuel remains high and volatile, fuel costs continue to adversely impact the group’s financial performance.”