Singapore Airlines (SINGY.PK) reported its first quarterly loss in more than two years this week on the back of higher fuel costs, weak demand from Europe, and increased competition from rapidly expanding Middle Eastern carriers.
One of the world’s few five-star carriers, Singapore Airlines has long found profitability catering to more discerning customers traveling long-distances, such as from Europe to Australia, taking advantage of its favorable geographic location as a convenient transit hub.
However, the rise of Middle Eastern carriers like Emirates, Etihad, and Qatar Airways and their similarly high levels of service (but more advantageous geographical position --80% of the world’s population lives within an eight hour flight of the UAE and Qatar) is starting to show signs of affecting Singapore Airlines’ bottom line.
Singapore Airlines no longer maintains a duopoly on high-end business and first class products along with Cathay Pacific (CPCAY.PK), which has resulted in an erosion in their pricing power and, concomitantly, lower yields.
While this trend is worrisome for the world’s second largest airline by market capitalization, the primary driver behind the company’s loss is one familiar to all investors in the airline industry: high oil prices. Even Middle Eastern behemoth Emirates saw its profits decline this quarter as a result of the elevated price of crude.
What can be extrapolated from this is that investors keen to gain exposure to airlines in emerging markets should look to airlines that are not just expanding rapidly but are also profitable even in times of elevated crude oil.
In this case, investors should consider Copa (CPA) of Panama. This week, CPA reported quarterly profits of $95.9 million, or $2.16 a share. This is up only slightly from its previous quarter's $2.14 a share, but in a much more challenging operating environment. Growth remains robust, increasing 22% year over year as the airline funnels travelers between North, Central, and South America through its Panama City hub.
With a forward P/E of 9.75, the ability to remain profitable with elevated oil prices, and a rapidly expanding network, investors could consider CPA on a pullback. Alternatively, if a trader sees oil prices going higher, creating a pair trade by going long CPA and shorting an American carrier that has abandoned fuel hedges like US Airways (LCC) could also make for a viable trade.