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2 Major Risks for Singapore Airlines

Singapore Airlines Ltd (SGX: C6L), or SIA, is Singapore’s flagship airline engaging in passenger and cargo air transportation. It operates the following airline segments: Singapore Airlines, Scoot, Silkair, SIA Engineering Company Ltd (SGX: S59), and Singapore Airlines Cargo (SIA Cargo).

While SIA has managed to weather many downturns and storms since its formation in 1972, the airline is currently caught in a funk. While it reported record revenue of S$16.3 billion in its full-year earnings release last week, net profit plunged 47.5% year on year to just S$683 million from S$1.3 billion. A situation where revenue increases while profit plunges certainly warrants a closer look, and investors need to be mindful of risks on the horizon that may further cloud SIA’s prospects. I explore two of these risks below.

Macroeconomic environment

SIA’s current passenger load factor has hit an all-time high of 83% from 81%, while revenue per passenger kilometre rose 7% year on year. Load factor measures the utilisation rate of SIA’s aircraft — the higher the load factor, the better for SIA, as this means more of its aircraft is being utilised (remember that the fuel required to fly an aircraft stays constant whether it is empty or full). While these operating statistics are certainly encouraging, it could all change very quickly should the current trade war between the US and China escalate further.

The trade war would make goods and services more expensive, which then affects worldwide supply chains as producers and distributors pass the costs down to final consumers. As the higher prices trickle down to consumers, the effect would be for them to tighten their wallets and rein in their spending. Air travel would thus get hit as it is considered a discretionary expense for most people.

Fuel costs

Another major risk for SIA is escalating fuel costs. Higher net fuel costs contributed two-thirds of the total increase in expenditure for SIA for fiscal year 2019 (FY 2019), as there was a 21.6% increase in average jet fuel prices over the period. While hedging did mitigate some of the increase, it was unable to offset the full impact of the higher fuel costs.

With fuel being a major cost component of SIA’s operations, a sustained rise in oil prices could further crimp profits for the airline. Though SIA has hedged 64% of its fuel requirement for FY 2020, the airline is still exposed to rising prices that it is unable to fully mitigate.

Investors should adopt a cautious stance

With these two significant risks looming over SIA, investors should adopt a more cautious stance and monitor macro-developments and oil prices before deciding if they should invest in the airline.

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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 contributor Royston Yang does not own shares in any of the companies mentioned.