Outlook
We expect demand for non-essential air travel to taper in the near term, affecting LCCs such
as Scoot, HK Express, and AirAsia. Full-service carriers (FSC) in SEA will benefit from the
rerouting of Europe-bound traffic away from Gulf transit hubs, with SIA and Cathay Pacific
already adding UK capacity to capture South Asia to Europe demand. Demand for the Gulf
may be dampened in the long term. However, state-owned Gulf carriers have the fiscal
capacity to offer discounted fares to stimulate recovery. This will create a competitive
dynamic that non-Gulf carriers flying into the region may not be able to match. Singapore’s
decision to delay its sustainable aviation fuel (SAF) levy to 2027 preserves Changi’s cost
competitiveness as a transit hub, avoiding an additional cost layer for international carriers
already subject to European Emissions Trading Scheme (ETS) tax on departure.
Regional carriers such as Cathay Pacific and Philippine Airlines have raised fuel surcharges by
c.30%. SIA has similarly increased fares across both its FSC and LCC operations. While carriers
face a similar fuel-cost environment, differences in hedging positions mean fare increases will
be uneven across the industry, where airlines with greater unhedged exposure may be forced
to reprice more aggressively. Many Asian carriers, such as Cathay Pacific, hedge only on Brent
crude. This has exposed them to fuel price volatility from the widening crack spreads (i.e.,
margin between crude oil and refined jet fuel), which has surged more than 5x from US$8.2
pre-conflict to US$57.3 as of end Mar26.
SIA, however, hedges on both Brent crude and jet fuel. As of Nov 25, the group had partially
hedged Q4 FY25/26 fuel costs, with 38% hedged on jet fuel and 9% on Brent, protecting it
from near-term price volatility. Hedging declines sharply across the forward profile, with jet
fuel hedged at 3%, and Brent hedged at 21% for 2H FY26/27. If the war lasts beyond 2Q 26/27,
SIA’s protection against widening crack spreads diminish materially, exposing the airline to
elevated jet fuel costs absent any new hedging positions.
Recommendation
SIA (SIA SP, Neutral, TP S$7.00) The conflict is likely to weigh on 4Q FY25/26 earnings. Fuel
accounted for c. 28% of post-hedge revenue in FY25, and SIA’s dual-hedge structure provides
better insulation to increasing fuel cost than regional peers. On the demand side, SIA has
increased Singapore-London Gatwick frequency from 3 to 10 times weekly to capture traffic
rerouted away from Gulf hubs. Cargo yields may also benefit, as Hormuz Strait and Red Sea
disruptions divert time-sensitive shipments to air freight.
SATS (SATS SP, BUY, TP S$4.44) SATS is expected to be resilient to the Middle East (ME)
airspace closures. Gateway services revenue is affected by c. 3% due to reduced ME-bound
flights. However, this may be offset by incremental traffic rerouted through Changi, which
drives additional ground handling volumes. Storage fees associated with delayed ME-bound
shipments also provide a partial offset to the dampened demand in the region.
China Aviation Oil (CAO SP, BUY, TP S$2.53) China’s ban on refined jet fuel exports may
constrain CAO’s SAF trading business targeting European markets. However, SAF currently
accounts for a low single-digit share of CAO’s total trading volume, limiting the near-term
impact on earnings. The core business of supplying jet fuel to local airports remains intact,
and we expect a more geographically diversified jet fuel procurement strategy amid the
conflict.
SIA Engineering (SIE SP, ACCUMULATE, TP S$4.14) Gestation losses from new facilities in
Malaysia and Cambodia may persist longer due to the dampened air travel demand. However,
increased flight frequencies through Changi may lead to higher line maintenance volumes for
SIAEC. Overall, SIAEC’s earnings profile remains insulated from the conflict given the non
discretionary nature of aircraft maintenance.
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Hashim graduated from the National University of Singapore with a degree in Business Administration.
