Singapore Airlines: Flying High on Passenger Demand, But Can It Navigate Fuel Headwinds?

The Singapore Airlines Group (SG:C6L) reported a 4.5% year-on-year surge in passenger traffic for June 2025, driven by strong seasonal demand and the continued expansion of its low-cost subsidiary, Scoot. This growth, paired with an improved passenger load factor (PLF) of 88.7%, highlights the airline's resilience in recovering from pandemic-era disruptions. However, persistent headwinds in the cargo sector and rising crude oil prices threaten to offset near-term gains. Investors must weigh the structural recovery in travel demand against the risks of fuel volatility and global trade uncertainties.

The Passenger Surge: Scoot's Role in the Recovery

The group's passenger traffic rose to 3.46 million in June, with Scoot contributing 1.0 million passengers—a 13.2% year-on-year jump—while Singapore Airlines (SIA) carried 2.2 million passengers (+5.7%). This disparity underscores Scoot's critical role in driving growth through its budget offerings, particularly on shorter regional routes. The PLF improvement to 88.7% (up 1.3 percentage points from June 遑2024) reflects efficient capacity utilization, with Scoot achieving a remarkable 92.2% PLF, outperforming SIA's 87.7%.

The summer travel season and mid-year school holidays in Singapore provided a tailwind, but the sustained demand also signals a broader recovery in leisure and business travel. Analysts note that SIA's network expansion—now covering 129 destinations across 37 countries—has positioned it to capitalize on pent-up demand.

Cargo Challenges: A Cloud on the Horizon

While passenger metrics shine, the cargo segment faces headwinds. Cargo traffic grew just 0.4% year-on-year to 94.9 million kg, while capacity expanded 3.3%, dragging the cargo load factor down to 56.4% (-1.6 percentage points). This underperformance stems from slowing global trade volumes, exacerbated by geopolitical tensions and supply chain bottlenecks.

The cargo division's struggles contrast sharply with passenger success, creating an uneven revenue picture. SIA's reliance on oil—which accounts for 30% of its operating costs—adds further pressure. Crude prices have risen 15% year-to-date, and if sustained, could squeeze margins despite hedging efforts.

Fuel Volatility: The Elephant in the Cockpit

The airline's sensitivity to oil prices is undeniable. A $10-per-barrel increase in crude translates to approximately S$20 million in annualized fuel costs for SIA. With Brent crude hovering near $80/barrel and geopolitical risks (e.g., Middle East tensions, Chinese demand) keeping prices volatile, investors must assess whether SIA's hedging strategies can mitigate this exposure.

The company's 6.7% dividend yield—a near-decade high—offers some near-term comfort. However, dividend sustainability depends on maintaining profitability amid rising costs.

Balancing Act: Is SIA a Buy?

The stock closed at S$7.36 on July 15, a 0.8% gain on the day but below the analysts' average price target of S$7.00. Technical signals suggest a “Buy,” but fundamental risks linger.

Bull Case:
- Passenger demand remains robust, with Scoot's aggressive route expansion (e.g., new Vienna service) fueling growth.
- PLF improvements and a modern fleet (e.g., Boeing 787s, Airbus A320s) support cost efficiency.
- High dividend yield provides downside protection.

Bear Case:
- Cargo weakness and fuel inflation could compress margins.
- Analyst sentiment is mixed (3 Buy, 6 Hold, 5 Sell), reflecting uncertainty about the cargo recovery and macroeconomic risks.

Conclusion: Hold for Now, But Monitor Oil

SIA presents a compelling story of post-pandemic recovery, with Scoot's growth and strong passenger demand underpinning its appeal. However, the dual challenges of cargo stagnation and rising fuel costs warrant caution. Investors should consider a Hold stance unless oil prices stabilize or cargo trends improve. The dividend yield offers a cushion, but structural risks remain until global trade and energy markets find clearer direction.

For those with a long-term horizon, SIA's network strength and Asia-centric strategy position it well for sustained recovery. Yet in the near term, the stock is a balancing act between demand resilience and operational headwinds.