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A Singapore Airlines A350 performing the inaugural flight from Seattle. (Photo: AirlineGeeks | Katie Bailey)

Singapore Airlines Posts Heavy Losses Over Ineffective Fuel Hedging

Last week Singapore Airlines posted the first full-year loss of its almost 50-year history amid a collapse in demand due to the COVID-19 pandemic and some heavy losses on its fuel hedging policy.

The airline recorded a net loss of 212 million Singapore dollars ($149.1 million) for the fiscal year ending on March 31. This compares to a 683 million Singapore dollar profit for the previous 12-month period.

On March 24, the small country of Singapore prohibited all short-term visitors to enter or transit through the city, therefore causing a dramatic drop in traffic for all airlines in the Singapore Airlines Group.

Singapore Airlines itself recorded a 9.3% load factor in April 2020, compared to 83.2% in April 2019. It’s regional subsidiary SilkAir ended the same period with a 34.1% load factor, down from 78.1% the year before, and its low-cost arm — Scoot — was able to fill only 5.9% of its capacity in April 2020, which in fiscal year 2018-2019 filled 86.8% of its available seats.

The results were partially offset by a good performance for cargo traffic: the cargo load factor was 75.6%, with an increase of 17.5 percentage points compared to April 2019. That, however, does come with a caveat, as capacity was cut by 64.7%.

Singapore Airlines has reduced its schedule by approximately 96%, maintaining service only to 14 destinations, but it has been able to reduce its current expenses only by 65-70%.

“SIA highlighted there is no visibility on the timing on trajectory of the recovery, but does not assume to reach pre-Covid[-19] levels in the next one to 1.5 years,” Credit Suisse analysts Louis Chua and Shaun Tan told the Singapore Business Times.

The carrier also posted a substantial 710 million Singapore dollar loss as a result of ineffective fuel hedging contracts that matured during the last fiscal year.

Singapore Airlines has a hedging policy very different to those of many carriers. They are the only carrier hedging their fuel needs up to 60 months in advance, and the sudden drop in the price of crude oil caused by the COVID-19 pandemic is likely to cause significant losses for the airline in the fuel hedging department until 2025.

At the end of January 2020, Singapore Airlines had hedged 79% of its fuel requirements for February and March at an average price of $76 per barrel, the Singapore Business Times reported. For the full fiscal year ending on March 31, the airline had hedged 73% of its fuel needs at a price corresponding to $58 per barrel.

After the COVID-19 outbreak, the price of crude oil collapsed to reach a record low — close to $10 per barrel — and it is now trading close to $30 per barrel. Singapore Airlines has already hedged 59 percent of its fuel needs for the next four years at prices above $50 per barrel, meaning the airline is vastly overpaying for the time being.

While it is not uncommon for many international carriers to use fuel hedging tools to reduce the risks of price volatility for a 12-month time horizon, very few carriers buy fuel more than two years in advance. Southwest Airlines and Japanese carriers Japan Airlines and All Nippon Airways are among the carriers hedging fuel over a period of three years or longer, an analyst at Morgan Stanley told the Singapore Business Times.

The airline has said it expects potential fuel hedging losses for 2.6 billion Singapore dollars for the next fiscal year.

Vanni Gibertini
Vanni Gibertini
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