INVESTORS might be wondering whether Singapore Airlines' (SIA) road to profitability would now be derailed by soaring oil prices and safety concerns flying over Europe airspace sparked by Russia' s invasion of Ukraine.

 

Brent crude has risen by about 60 per cent year to date, first boosted by increased economic activities and now a possible cut in supply due to increasing sanctions against major oil producer Russia. The liquid gold surged past US$115 a week ago and edged towards US$140 momentarily on Monday (Mar 7) as tensions between Russia and Ukraine intensified.

 

SIA incurred losses in fuel hedging amounting to hundreds of millions of dollars in FY2021 when Brent crude tanked in 2020 as global economic activities were hit and international border closures shut down air travel as the pandemic unfolded.

 

Managing price volatility

 

Having been burnt, the carrier has paused hedging since March 2020 and also cut its hedge position to 30 per cent of its projected consumption till March 2022 and 40 per cent thereafter to June 2023 at an average Brent price of US$57 a barrel and US$60 respectively.

 

SIA has said that it does not take a view on oil prices, and that its rationale for hedging is to manage price volatility of fuel.

 

Fuel is a main cost for airlines and would typically take up 20 to 30 per cent of cost.

 

SIA' s net fuel cost climbed 131.6 per cent in the third quarter to December 2021, contributing 28.3 per cent of total cost, mainly on higher fuel prices and an increase in consumed volume in tandem with expanded flight capacity. The net cost excluded fuel hedging ineffectiveness due to over-hedging and fair value gain or loss on fuel-hedging derivatives.

 

The airline did a cost analysis on its sensitivity to fuel prices in its FY2021 annual report: every US$1 change per barrel in fuel price before hedging affects SIA' s annual fuel cost for its passenger fleet by about S$5 million - before accounting for exchange rate movements in the greenback and changes in fuel volume consumed.

 

Given that SIA expanded capacity to take advantage of the quarantine-free Vaccinated Travel Lanes (VTLs), the fuel productivity of the passenger fleet should also be looked at. Measured by load tonne-kilometre per barrel, the metric is influenced by the load factor or the percentage of available seating capacity filled by paying passengers.

 

SIA and low-cost carrier Scoot had a passenger load factor that ranged from 17.5 per cent to 46.5 per cent between August 2021 and January 2022, with the peak logged in December fuelled by year-end travel demand and expanded VTL flights.

 

In its FY2021 annual report, SIA said every 1 per cent change in fuel productivity would have an impact on the annual fuel costs before hedging of about S$3 million, before accounting changes in fuel price, the US dollar exchange rate and flying operations.

 

The carrier might mitigate its higher fuel expenditure by imposing a fuel surcharge. Indeed, after fuel prices climbed to over US$138 per barrel in April 2011, SIA raised the surcharge by US$4 to US$32 - shortly after an earlier hike of US$3 to US$27 in January 2011 when fuel shot past S$110.

 

Uncertain times

 

As Singapore intends to further reopen, the airline is expected to ramp up its capacity. Will the load factor drop as a result or will higher demand will help to bolster fuel productivity? Would ongoing geopolitical tensions dampen travel to Europe, a strong market for SIA, in such uncertain times?

 

Shukor Yusof of aviation consultancy Endau Analytics pointed out that the US dollar is likely to strengthen now as it is the world' s reserve currency. He noted this will hit airlines' earnings as aviation costs - be they for fuel, aircraft or spare parts - are denominated in the greenback.

 

He added: " Whether you' re hedged or unhedged, you will get hurt because life in the rest of Europe cannot go on as normal while Ukraine continues to burn."

 

The carrier had recently chalked up earnings of S$85 million for the quarter to December 2021 - its first profit since the coronavirus reached global shores in early 2020. Will its recovery be hit as the fuel price remains elevated and as the Russia-Ukraine conflict remains unresolved? That' s the question now on investors' radar.