SIA, Tiger shares soar as oil prices fall to six-year low

SINGAPORE — Shares of Singapore Airlines (SIA) and its budget subsidiary Tiger Airways surged in active trading yesterday as crude oil prices fell to a six-year low, pressured by a persistent global glut and a strong United States dollar.

“Airline shares gain when oil prices fall as airline companies get projected cost savings from the reduced fuel prices, which would, therefore, increase their profit margins. Share prices gain due to this effect as traders’ confidence gains,” said Mr Daniel Ang, investment analyst at Phillip Futures.

SIA shares rose 41 cents, or 3.5 per cent, to close at S$12.03 each yesterday, only one cent off the intraday high of S$12.04, after about 1.3 million shares changed hands. Shares in its 56-per-cent-owned unit Tiger jumped 1.5 cents, or 4.8 per cent, to close at 32.5 cents with 33.7 million shares traded. The benchmark Straits Times Index rose 0.4 per cent to finish at 3,376.04.

World crude stockpiles are rising at a rate of 1.6 million barrels per day, Reuters reported yesterday, citing estimates from Societe Generale. The French bank forecasts the build-up will accelerate to 1.7 million barrels per day in the second quarter, it added, amid fears that the US is running out of storage facilities to hold the excess volumes.

Benchmark US crude yesterday fell as much as US$1.27 to US$43.57 a barrel, the lowest since March 2009, before rebounding to around US$44.19 late in Asia. Meanwhile, benchmark Brent crude plunged US$1.34 to US$53.33 a barrel, its lowest since early February, before recovering partially to US$54.20, Reuters reported.

The strength of the US dollar is also weighing on commodities, including crude oil, ahead of the Federal Reserve’s policy meeting this week amid expectations that the central bank will raise borrowing costs in June.

SIA, which benefited little from the oil price plunge last year because it had hedged against volatility by locking in future supplies at high prices, said yesterday it reviewed its hedging policy regularly, but did not provide additional details.

Replying to queries from TODAY on how it will tweak its approach in light of the current weak oil price environment, SIA said: “The objective of our fuel-hedging programme is to smooth out volatility in fuel prices, and it should be noted that our hedging policy is reviewed regularly.” SIA pointed out that it provides guidance on the hedging programme twice a year at its half-year and full-year results announcements.

In its third-quarter earnings announcement last month, SIA said it had hedged 65 per cent of its jet fuel requirements at an average price of US$116 per barrel, leading to a hedging loss of S$216 million, compared with a gain of S$48 million in the corresponding period in the previous year.

Tiger, which hedged 35 per cent of its fuel requirements at around US$111.68 per barrel, said its net derivative financial liabilities increased by S$39.2 million to S$40.2 million as of the end of last year, mainly due to fuel-related hedging instruments.

While the levels locked in by the hedges are overpriced compared with current oil prices, airline companies are not likely to drastically change their hedging strategies, analysts say.

“Airline companies look for consistent hedging policies. Even if oil prices fluctuate, most airlines will keep a consistent policy and will not change them. They do not go for any knee-jerk reactions and will not gamble on changing their policies due to lower oil prices,” said Mr Brendan Sobie, chief analyst at market research firm Centre for Aviation.

As airline stocks climbed on the oil price plunge, shares in rig builders Keppel Corp and Sembcorp Marine fell yesterday amid fears that capital expenditure for exploration and production activity will be curtailed. Keppel Corp shares closed down 0.1 per cent at S$8.69 while Sembcorp Marine shares fell 1 per cent to end at S$2.95.