Will Singapore Airlines Shine In The Low Oil Price Environment?

The collapse in oil prices had started in earnest in late 2014 and continued on throughout 2015, ultimately resulting in the price of the commodity dropping from over US$100 per barrel in mid-2014 to around US$30 today.

With the cost of jet fuel – which is linked to the price of oil – being a huge component of an airline’s overall expenses, it’s logical to think of lower oil prices as a benefit for Singapore’s flagship carrier operator, Singapore Airlines Ltd (SGX: C6L).

But interestingly,  shares of Singapore Airlines have actually declined by 4% in value since the start of 2015 even as the price of oil has fallen from the neighbourhood of US$50. Can Singapore Airlines actually benefit from the low-oil-price environment at all?

One key reason why the potential benefit of low oil prices seem to be sticking to Singapore Airlines slowly is because of the carrier’s strategy of hedging its fuel costs. In its fiscal year ended 31 March 2015 (FY2015), Singapore Airlines reported a S$549 million hedging loss for fuel as most of its fuel are hedged at prices before the price of oil really sank.

Fortunately, after these hedges expire, Singapore Airlines should be able to hedge its fuel costs at a much lower price that’s reflective of the current environment. With that, the company should be able to benefit more from lower oil prices.

There are already signs that this is playing out. In its latest fiscal quarter (the quarter ending 31 December 2015), Singapore Airlines’ operating profit came in at S$288 million, nearly double the S$146 million seen a year ago. Fuel costs for the quarter had declined by a handsome 23.7% year-on-year.

But, there may be cloudy skies ahead. There have been news reports of airlines in South East Asia deferring their plane deliveries for this year.   The moves come after intense competition had rose in the region.

As competition heats up, Singapore Airline’s profit margin may shrink. In fact, competitive pressures in the region might be one strong reason why Singapore Airline’s subsidiary, Tiger Airways Holdings Limited (SGX: J7X), has been unable to turnaround its business for the past few years, logging losses in each of its last four completed-fiscal years.

(Singapore Airlines is currently in the process of taking Tiger Airways private.)

Foolish Summary

Although a reduction in fuel costs might benefit the cost structure of airlines greatly going forward, the advantage Singapore Airlines can enjoy would be similar to all or most of its competitors in the region. Thus, without a clear and distinct advantage over its peers, the intense competition seen in the market might dampen Singapore Airline’s chances of truly shining in the current environment of low oil prices.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn’t own shares in any companies mentioned.