Singapore Airlines (SIAL.SI), the world’s No.2 airline by market value, expects recovery in passenger demand to continue after reporting its best quarterly profit in almost two years as cargo volumes rebounded and travel improved.

The airline industry is recovering from its worst downturn last year, but growth in the more profitable business class segment, where SIA thrives, is slow and could take time to capture pre-crisis level. 

“Passenger loadings in January and bookings in hand indicate that the recovery in the third quarter is likely to continue in the final quarter of the current financial year,” SIA said in a statement. 

“The business outlook for the group in 2010 is encouraging, but it must be acknowledged that uncertainties linger over the global economy.” 

The Singapore carrier saw a strong December when cargo traffic turned positive for the first time in 19 months and year-end travel boosted demand, but it has trailed the recovery seen by Hong Kong’s Cathay Pacific (0293.HK), which is helped by China’s strong demand.

CLSA expects February’s Singapore Airshow could boost premium traffic and the mass market could benefit from the opening of the city-state's two casino resorts later this year. 

But the aviation industry body IATA said last week the sector could face a tough 2010, making up for the lost demand in 2009 and handling new security demands. 

SIA, 55 percent-owned by state investor Temasek Holdings (TEM.UL), reported a net profit of $403.7 million in its third quarter, its highest quarterly profit since March 2008. 

The results compared to a net profit of $337 million a year ago, but below analysts’ average forecast of $448 million. 

Earnings from US rivals so far this quarter have been mixed, raising concerns about the industry’s recovery. 

At the close of trade, SIA shares were down 8.6% since the start of the year compared to an 9.4% drop in shares of Cathay Pacific and a 6% drop in the broader Singapore market.  

The stock closed 1.4% lower today ahead of the results, giving SIA a market capitalisation of about US$11.7 billion ($16.5 billion), ranking it behind Air China.