SIA finally sees clear skies ahead as massive hedging losses vanish
Profitability will rebound sharply in Q2.
Singapore’s flag carrier has failed to make the most out of low fuel costs due to unwise hedging decisions, but analysts from BNP Paribas believe that Singapore Airlines is finally headed for a sharp profit rebound in coming quarters.
“We believe SIA is at the start of an up-cycle, as oil prices have retreated a lot since late last year and SIA’s hedging losses are now on the decline,” BNP Paribas said.
Big hedging losses hampered SIA’s profits in past quarters, masking underlying margin expansion despite significantly lower gross fuel costs.
“We think this is why the market is underestimating how sharply its profitability will rebound. We expect earnings to beat consensus estimates from 2Q FY3/16, triggering a re-rating of the stock,” the report noted.
Although some analysts fear that low oil prices will lead to industry over-capacity and profit destruction for all airlines, BNP Paribas is confident that this fear will not come to pass.
“We disagree with this view, at least for the near term, because capacity being added now was ordered years back when oil prices were still high, and aircraft ordered now would not be delivered for another couple of years. This leaves a window of opportunity for airlines over the next few years,” the report said.