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Singapore Air profit drops on fuel cost

SINGAPORE - Singapore Airlines posted a 15 percent drop in quarterly profit due to costlier jet fuel but still managed to beat market expectations despite uncertain times for the aviation industry.

Asian airlines face a massive hit to earnings as soaring fuel costs and dwindling demand for travel create turbulence that has already bankrupted some small carriers.

‘The price of jet fuel has risen more than 75 percent year-on-year, and the strains on financial markets have not abated,’ said Singapore Air, the world's second-biggest airline by market value, in a statement.

Jet fuel traded in Singapore has come off a peak hit this month above $181 per barrel but is still about 80 percent above levels seen a year ago, reflecting the spike in crude oil

Singapore Air said its expenditure on fuel rose 31 percent to S$1.53 billion during the quarter, partly mitigated by hedging gains of S$349 million. At 40 percent of total spending, the cost of kerosene is its single-biggest expense.

SKY-HIGH FUEL

The International Air Transport Association (IATA) issued a gloomy outlook in June, forecasting a $6.1 billion loss for the industry in 2008 -- a sharp turnaround from the $4.5 billion profit it predicted in April -- blaming sky-high fuel prices.

Shares in Singapore Air closed down 0.9 percent at S$15.28 each on Monday before the results were released. The carrier will hold its annual general meeting on Tuesday.

Singapore Air, which at $13.4 billion ranks behind Air China , said April-June net profit was S$358.6 million ($263 million) compared with S$424 million a year ago. This beat an average forecast of S$286 million from three analysts polled by Reuters.

Revenues at the airline, which relies on premium and business travellers for half its sales, were S$4.13 billion compared with S$3.6 billion a year ago.

Singapore Air, 55-percent owned by sovereign fund Temasek UL] , has reported five straight months of falling passenger and cargo loads, as demand failed to keep pace with higher capacity boosted by the delivery of five Airbus A380 superjumbos.

The group also saw lower contributions from its listed subsidiaries as they were hit by higher costs and poorer demand.

SIA Engineering posted a 17 percent fall in first-quarter earnings, while Singapore Airport Terminal Services earnings fell 28 percent. SIA owns 81 percent in both.

But its regional subsidiary SilkAir posted an operating profit of S$10 million in the quarter, up 79 percent from a year ago.

CUTTING ROUTES

The carrier said stopped unprofitable routes, including five weekly flights to Osaka via Bangkok from May 2008, and the four weekly flights to Los Angeles via Taipei from October 2008.

Singapore Air, with Temasek, in Febraury failed to take a combined 24 percent stake in China Eastern Airlines for $920 million, but could still bid for the Chinese carrier in order to break into the world's fastest-growing aviation market.

CEO Chew Choon Seng said in May the company was also open to offers for its 49 percent stake in Richard Branson's trans-Atlantic airline Virgin Atlantic, which it viewed as ‘an underperforming investment’.

Analysts estimate SIA has about S$4 billion in cash, which they expect could be boosted by further sales of aircraft, after it said earlier this month it had sold five Boeing 777 aircraft to the Pembroke Group and leased them back.

SIA shares are down 12 percent so far this year, outperforming the benchmark Straits Times index's 16 percent fall and regional rivals Qantas, which fell 36 percent, and Cathay Pacific, which lost 24 percent.