Singapore Airlines’ (SIA) 1QFY10 losses of S$289.1m are the first-ever second consecutive quarterly losses. 1QFY10 losses included realised fuel hedging losses of S$307.1m. SIA's passenger operations turned in losses of S$271m, even as breakeven load factor reached 84.3%. We estimate that excluding fuel hedging losses, breakeven level would have been close to 78%.
At first blush, the numbers should come as a shock to the market, but excluding the fuel hedging losses, we believe they would be close to market expectation. However, the steep decline in passenger yields is greater than our full-year expectation of an 8% decline in passenger yields. Cargo yields likewise weakened and we will most likely adjust that downwards as well. An upcoming analyst meeting on Monday will provide further indication as to the cause of decline in yields. SIA will undertake more cost-cutting measures.

We will be cutting our earnings numbers following the analyst briefing. The next three quarters will see no earnings contribution from SATS following the distribution of SATS shares to shareholders. This will result in lower top-line numbers. Compensating for that will be sharply lower fuel costs.

For the past two quarters, we have been arguing that SIA was facing a structural slowdown and not a cyclical slowdown and as such should not be valued on a P/B basis. The two consecutive quarters of losses have vindicated our stance, although we were expecting a recovery in traffic in 2H09. We retain our SELL recommendation on SIA and retain our exdividend fair price of S$9.80.