Fuel price hits Singapore Airline's profit

SINGAPORE - Singapore Airlines, the world's second-most-valuable airline, posted a 38 per cent drop in quarterly profit, hit by high jet-fuel costs and cut-throat competition, but beating market forecasts.

Fourth-quarter net profit fell to S$297.8 million ($251 million) from S$478 million a year earlier and S$476 million in the third quarter. Analysts had predicted around S$201 million.

Full-year earnings, however, rose sharply to S$1.39 billion from S$849.3 million the previous year, when the airline still felt the effects of the Sars virus, which battered Asia's travel industry. Analysts had predicted full-year net of S$1.35 billion.

Analysts have said profitability at the airline, which is 57 per cent state-owned and known for its premium service even in economy class, is still exceptional in an industry dominated by ferocious competition.

Profits at Singapore Air, whose US$8.5 billion market value makes it second only to America's Southwest Airlines, contrast sharply with quarterly losses of hundreds of millions of dollars racked up by major American carriers US Airways, American Airlines and Continental Airlines.

Ahead of the results, Singapore Air's earnings for the year to March 31, 2006, were expected to dip to S$1.26 billion, according to forecasts from 17 analysts surveyed by Reuters.

The industry's main worry this year remains the unpredictable price of fuel, which has overtaken staff as Singapore's biggest expense.

Chief executive Chew Choon Seng has been unable to pass on a 51 per cent jump in jet-fuel prices to customers as discount carriers have started up in the region.

On Monday, rival Japan Airlines said cost cuts had helped it to turn in a forecast-beating annual profit of 30.1 billion yen ($392 million) after a loss the previous year.

"Passing on costs to passengers will be limited, given that there is more competition," said Mark Tan, an investment strategist at UOB Asset Management, which manages US$3.5 billion of assets, including Singapore Airlines shares.

"If fuel prices remain at the levels they are right now, airlines' costs are going to go up."

Singapore Air said earlier this year it expects more headwind on short-haul routes as a result of rivalry from some 10 low-cost carriers now flying in Asia, such as Valuair, set up by ex-Singapore Air staff, Malaysia's AirAsia and Qantas Airways' Jetstar Asia.

Shares in Singapore Air gained 4.4 per cent in January-March but have weakened since amid investor concern over capacity utilisation. They are trading around S$11.40.

J. P. Morgan analyst Peter Negline said in a recent note that overcapacity, cheaper rivals, the impact of last year's tsunami and competition on the Europe-Australia route had hit the carrier's load factors and revenues.

The price of kerosene soared more than 50 per cent from the start of this year to a high around US$76 a barrel on April 10, but has since dropped back to near US$65.

To try to offset the impact onits profits, Singapore Air has increased a surcharge on long-haul flight ticket prices four times since last June, to around US$30.

Having risen less than 2 per cent in 2004 and well off its highs of around S$20 in 2000, Singapore Air's stock price has given investors little reason to cheer. It trades at 10.6 times estimated full-year earnings, Reuters data show, cheaper than European carriers Lufthansa or British Airways, but more than Qantas' price-earnings ratio of eight.

- REUTERS, BLOOMBERG