The threat of a US-led war against Iraq is driving up fuel prices, reversing this year's stock gains for Singapore Airlines Ltd and other Asian carriers.
Shares of Singapore Air had their biggest drop in a month on Thursday, extending their decline to more than 10 percent since Asia's most profitable carrier told analysts last month it was "upbeat" about traffic prospects. US President George W. Bush is consulting with allies ahead of a possible attack on Iraq, prompting some investors to sell airline stock.
"In the near term, our view is more cautious given the risk of a fuel shock" and growing worries about the US economy, said Kenneth Tang, who helps manage US$2 billion at Credit Agricole Asset Management and has sold Singapore Air and Korean Air Co stock.
Regional airlines weathered last year's slump in air travel after the Sept. 11 attacks and US economic slowdown better than US and European counterparts partly because many had already slashed costs and capacity during Asia's 1997 financial crisis.
Investors, who flocked to Asian carriers earlier this year as air traffic expanded, now say a war in Iraq may hurt economic growth and rising fuel prices will pummel profits.
"There is a wild card because of what the US intends to do in Iraq, and the whole thing hinges on oil prices," said Philip Wickham, an analyst at ING Financial Markets. "If oil spikes to US$40 a barrel and acts as a brake on world demand, then air travel will fall off and margins will be squeezed."
Crude oil for October delivery rose US$0.71, or 2.5 percent, to US$28.98 a barrel on the New York Mercantile Exchange on Thursday.
Prices have risen 46 percent this year. Jet fuel prices in Singapore, Asia's largest oil market, traded on Thursday at US$30.95, after reaching almost a one-year high US$31.20 last week.
Bush will outline his case for action against Iraqi leader Saddam Hussein at the UN General Assembly next week.
The US accuses the head of the Middle East's fourth-largest oil producer of developing chemical, biological and nuclear weapons.
Singapore Air fell as much as 2.8 percent to S$10.60 yesterday, ending the morning session at S$10.70. Korean Air, the world's No. 4 cargo airline, fell as much as 8.3 percent to 13,850 won in Seoul as of 2:40pm. Rival Korean carrier, Asiana Airlines fell as much as 7.9 percent to 2,930 won.
Asian airline shares fell a total of 8 percent in July and August, according to the Bloomberg Asia Pacific Airlines Index of 17 carriers, reversing a 26 percent gain in the first half.
Andrew Tan, an analyst at ABN Amro, forecast an average annual aviation gasoline price of US$29 per barrel. Each dollar gain above his prediction will typically shave 4 percent off airline profits, he estimates. The average price this year is US$26.
Fuel accounts for between 15 percent and 20 percent of costs for many airlines, including Singapore Air and Hong Kong-based Cathay Pacific Airways Ltd.
"We have been hedging our oil purchases this year," said William Han, a spokesman at Korean Air, which is also betting that the stronger Korean won against the US dollar will help reduce the effect of more costly jet fuel.
Concerns over a slowing US economy, which may hurt cargo shipments from Korean Air and EVA Airways Corp, have also prompted some investors to sell.
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