As Asia’s premium airlines enter earnings season, their prospects are looking dire amid a double whammy of a strong greenback and higher oil prices.
“It’s very rare to see the U.S. dollar (USD) and oil move in the same direction. Both hit airlines’ earnings; fuel is 30 to 40 percent of costs and 70 to 80 percent of total costs are in USD, including fuel of course,” explained Michael Beer, vice president of Asia Pacific transportation and infrastructure at Citi in an emailed note.
The dollar and oil typically enjoy an inverse correlation but the energy market’s current supply-side dynamics, specifically production cuts from major exporters such as OPEC members and Russia, are to blame for the current phenomenon, he continued.
“Cathay and Singapore Airlines are losing their relative edge and they are disintermediated by Gulf, Chinese, and U.S. carriers,” Beer said.
Moreover, the growth of Asia’s rising middle class is benefitting low-cost carriers, especially AirAsia and India’s Indigo, rather than full-service names, Beer added. Low-cost options tend to dominate in emerging markets, he pointed out.
Citi has a sell rating on both Singapore Airlines and Cathay Pacific. The flagship carrier of the Southeast Asian nation announces third-quarter results on Tuesday, while Cathay reports 2016 final results on March 15.
Singapore Airlines enjoys better fuel hedges than Cathay’s, Beer said, but it faces a more competitive environment, with the Singaporean government offering airlines new slots and routes when the city-state’s airport opens a fourth terminal later this year.
–
Credit: CNBC
