Singapore Airlines earnings may hit turbulence

Major global airlines are seeing their earnings improve somewhat lately, as discussed in this recent AlphaNow article, thanks to their efforts to contain costs and manage capacity. Alas, Singapore Airlines seems to be bucking that trend, having been identified by the StarMine research team as one of the Asian companies that is likely to report earnings that fall short of analysts’ estimates when it reports results for the fiscal year ending March 31, 2012. Indeed, as Singapore Airlines continues to battle such industry headwinds as sky-high fuel costs, the company’s earnings outlook (at least those more recent estimates from those sell-side analysts covering the company with the best track record for accuracy and timeliness) has deteriorated to the point where it now has a large negative Predicted Surprise of -18% for the year.

The Datastream chart below shows that oil prices (Crude Oil-Brent) crept up above the psychologically important $100 level in 2011, and that they have stayed there. Given that fuel costs are one of the primary expenses for airline companies, this represents a clear headwind for earnings. Most airlines have been responding by cutting capacity, despite seeing marginally higher passenger traffic than a year ago. (If you wondered why the plane you’re on feels more full than it would have a year ago, that’s why.) This means the airlines can charge higher prices for tickets, as well as levying baggage and other fees to offset the higher fuel prices.

Alas: Singapore Airlines saw its ASK (Available Seat Kilometers) rise in December by 3.2% over year-earlier levels (as it did every month in the last year) while the load factor fell (on a year over year basis) in each period. Lower passenger loads combined with a higher ASK are a recipe for planes flying with more empty seats – and that’s not a good sign for earnings. Singapore Airlines, which has major operations in the Asian region, was also directly affected by last year’s Japanese tsunami and the recent flooding in Thailand also is bound to hit earnings. These are some of the reasons analysts gave when they cut their earnings estimates for Singapore Airlines over the course of the last quarter.

The I/B/E/S consensus estimate (represented by the gold line in the chart below) for Singapore Airlines has fallen from S$1.40 a share a year ago to 50 Singapore cents a share as of yesterday. Have these estimates fallen enough? Not according the StarMine SmartEstimate. That SmartEstimate (represented by the blue line in the chart) now stands at 41,Singapore cents a share, still well below the consensus. That may be an early indicator of future downward revisions. There are four analysts who cover the stock and who have been awarded five stars by StarMine for the timeliness and accuracy of their forecasts and whose track records signify they are worth heeding: all have earnings estimates that are below the consensus.

Analysts have noted that Singapore Airlines may be changing its strategy by focusing more on cargo shipments via its SIA Cargo subsidiary. This is one bright spot within the company, as this division has reported increasing load factors. However, the higher-than-expected fuel costs — that company management didn’t fully hedge — probably will also hit the earnings of SIA Cargo when the company reports full year earnings in May. Despite the recent downward revisions to the estimates, it looks like the current consensus estimate for Singapore Airlines may still be flying too high.

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