Singapore Airlines (SIAL.SI), the world’s No. 2 airline by market value, is on course to avert a full-year loss as a recovery in passenger and cargo demand helped it report its best quarterly profit in almost two years.

The airline industry is recovering from its worst ever 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.

The result missed analysts’ expectations, but came after two straight quarters of losses which had raised fears SIA may post a loss for the year that ends in March. SIA, which is led by CEO Chew Choon Seng, warned in July it could see a full-year loss if tough conditions persist.

“It’s very, very obvious that SIA will not have a full-year loss,” said Raymond Yap, a Kuala Lumpur-based analyst at CIMB.

The airline said passenger loads in January and current bookings indicate the recovery in the third quarter is likely to continue in the final quarter of the current financial year.

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

Daiwa Securities analyst Kelvin Lau said before the results that strong earnings in the third quarter would lead the market to re-rate SIA’s earnings for the full year.

SIA could post a net profit of $48.5 million for its full year, according to an average forecast from 16 analysts polled by Thomson Reuters before the earnings.

Trails Cathay
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 still trails the recovery at Hong Kong’s Cathay Pacific (0293.HK), which is helped by China’s strong demand.

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

And 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%-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 January-March 2008.

The results compared with a net profit of $337.2 million a year ago, but was below analysts’ average forecast of $448 million.

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

The stock closed 1.4% lower today ahead of the results. SIA has a market capitalisation of about US$11.7 billion ($16.5 billion), ranking it behind Air China (601111.SS) which has a value of about US$15.8 billion.