Optimism over Singapore Air is unfounded

P.R. Venkat & mohammed Hadi
The Wasll Street Journal

It is difficult to understand bullishness about Singapore Airlines when the carrier itself is warning of a difficult year.

The airline Thursday posted a $212 million loss for the quarter ended June and said it could be headed for its first ever full-year loss. Analysts collectively expected a near break-even quarterly figure, and still forecast an annual profit.

The surprise in the results was not so much the losses from the carrier’s positions on jet-fuel prices but the size of the hit to both passenger and cargo yields, which fell 18% and 33% respectively.

Passenger yields were last at this level in the first quarter of fiscal 2005, says the Centre for Asia Pacific Aviation. However, the airline’s costs have risen 32% since then.

Never mind, bullish analysts say. A turnaround for both cargo and passenger segments is near as global trade recovers and Singapore Air’s high paying passengers return to the skies later this year. The airline generates about 60% of its profit from business and first class passengers.

This is a tricky case to make. The H1N1 virus has already had a bigger impact on travel in Asia than many expected.

The long haul market upon which Singapore Air relies for much of its revenue — nearly three quarters come from flights to destinations outside of East Asia — could be slow to recover as businesses hesitate to fund long-distance travel, and tourists stay closer to home.

Cargo demand may have bottomed earlier this year, but a substantial recovery in global trade of goods that can be air freighted needs a pickup in consumption in the West — still a distant prospect.

Neither is Singapore Air trading at historically low valuations. The stock’s 20% recovery so far this year puts its price to expected book value ratio at 1.10, says Mirae Asset Securities analyst Jay Ryu. The last time Singapore Air posted a quarterly loss, during the 2003 SARS outbreak, its share price fell below book value.

And that was a relatively short-term hit.

At a shareholder meeting Friday, Chairman Stephen Lee said he anticipates a “prolonged period” of slackened demand.

The bulls, it seems, are deaf to the airline’s own warnings.


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