Singapore Airlines warns of full-year loss if recession lingers

Singapore Airlines, the world’s second largest airline by market value, sees a full year loss if tough conditions continue but said its cash position remains strong and it does not need to raise capital.

Singapore Airlines posted on Thursday its first quarterly loss in six years as the global recession hit passenger and cargo demand, and said the outlook for air cargo remains challenging.

“The Group’s first quarter performance reflected the adverse business conditions for airlines. If these conditions continue, the group expects to make a loss for the full year,” the airline said in a statement.

It said revenues from the airline’s operations exceeded cash expenditure, although not enough to cover depreciation charges.

“Net operating cash flow is expected to remain positive for the rest of the financial year. The group’s cash balance remains strong and the company does not foresee any necessity to raise capital.”

The combination of the global economic downturn, the outbreak of H1N1 influenza and fuel hedging resulted in a loss of S$307.1 million ($212.7 million) for its first quarter ended June 2009, compared to a profit of S$358.6 million a year ago.

“This is the first quarterly loss since the SARS crisis in 2003,” the company said in the statement.

Singapore Air, 54% owned by state investor Temasek Holdings, has been forced to reduce capacity by 11% in the 12 months from April, and cut salaries as well as working hours of its staff.

Analysts polled by Reuters estimates had expected a net loss of S$30 million for the period, but before the latest results still saw the airline making a full year profit of S$589 million compared to S$1.1 billion in the previous financial year.

Sharp fluctuations in oil prices and the expansion of budget airlines are likely to keep hurting full fare carriers especially the premium carriers like Singapore Airlines, analysts have said.

Singapore Air said hedging losses, after the firm hedged against its fuel bill when oil prices were around record highs, were expected to taper off over the course of the financial year.

UBS analysts Damien Horth recently said in a research report that Singapore Airlines’ fleet configuration might be a strategic mistake, which could lead it to attempt to sustain a yield premium, a situation that he thinks is not possible in the current economic environment.

Last year the carrier introduced all business class flights between Singapore and Los Angeles and New York, with five jets configured in such a way that only enables them to carry 100 passengers, instead of more than 300 normally.

Singapore Airlines saw its overall load factor falling to 67.6% in June from 68.5% the same time last year, although the number has recovered slightly from 62.1% in February.

The International Air Transport Association (IATA) has said total losses of the world’s airlines in 2009 would reach $9 billion and in the January-March quarter the group said the losses had reached $3 billion.

Singapore Airlines shares rose 33% during the quarter, slightly underperforming the 37.2% jump in the broader index or one of its main rivals Cathay Pacific, which has gained 38.7%.

The results were announced after the market closed on Thursday, when the company’s shares ended 1.35% higher at S$13.52 each, trading at 15.9 times its 2010/11 earnings.