Sell, target S$9 (0.7x P/B): Post Cathay Pac's profit warning, we revisit SIA's jet fuel sensitivities. We forecast SIA to book hedging losses of about S$330m in its 2HFY09 earnings (1H: S$533m gain), and there also may be equity fair value reserve adjustments for unrealized losses. On an FY10E assumption of US$79/bbl jet fuel, a US$1/bbl change impacts profit by about S$50m. Our Sell on SIA is premised more on a deteriorating revenue outlook (weaker passenger demand, yield pressures, cargo losses) than fuel cost fluctuations.

Jet fuel hedging: SIA enters into OTC jet fuel contracts (swaps, options) up to 18 months forward. Beyond this it has a small amount of proxy hedging via gas oil contracts out to 24 months. As of Oct-08, SIA had hedged 49.3% of its budgeted 36m bbl FY Mar-09 needs in an average range of US$117-121/bbl.

Accounting: As "effective" hedging instruments, SIA only recognizes to earnings realized gains/losses of matured contracts. Unrealized gains/losses go to a fair value reserve in equity, assessed on a contract by contract basis, the other side booked as a balance sheet debtor (gain) or creditor (loss). In 2QFY09 (Sep 08) SIA recognized realized fuel hedging gains of S$185.8m to earnings, but also S$994m of (largely fuel) unrealized hedging losses to equity fair value reserves.

Sensitivity: Our current FY10 profit forecast of S$1bn (EPS: S$0.85) assumes spot jet fuel at US$75/bbl (US$79/bbl including into-plane premium), versus the 8 Jan 2009 spot price of US$64/bbl. For every US$1/bbl change in that assumption, we compute a profit impact of S$50m, or 4.9% of our FY10E net profit forecast of S$1,012m (c. 16% below Bloomberg consensus: S$1,203m).