Emirates Sticking With Superjumbo Splurge After Profit Drops 76%

Singapore Airlines Ltd. (SIA), the second- largest carrier by market value, and Emirates, the world leader on international routes, reported tumbling earnings after fuel costs climbed and the economy hurt occupancy levels.

Net income at Emirates dropped 76 percent to 827 million dirhams ($225 million) in the six months ended Sept. 30 after a $1 billion surge in fuel costs without which earnings would have been “pushing 5 billion dirhams,” President Tim Clark said in an interview. Singapore Air’s second-quarter profit slumped 49 percent to S$194 million ($152 million), it said in a statement.

Industrywide earnings will fall by more than half this year and 40 percent in 2012 as a global slowdown hurts bookings, the International Air Transport Association predicts. Pressure on profit is being exacerbated by kerosene prices that averaged $125.78 a barrel in the second quarter in Singapore trading, versus $86.65 a year earlier, according to Bloomberg data.

“The underlying problem is this artificially, speculatively driven oil price which bears no resemblance to the true reality of where it should be,” Clark at Emirates said. “I don’t know where that money’s gone, but we made somebody rich.”

Advance bookings are showing “signs of weakness,” especially in Europe and the U.S., as economic uncertainty damps demand, Singapore Air said. Three-month load factors, a measure of occupancy, slid 1.9 percentage points to 77.5 percent as it lifted capacity 6.3 percent and traffic rose only 3.8 percent.

Arab Spring, Earthquake

Emirates added 8.2 percent more seating in the six months, faster than the 5.7 percent gain in traffic, pushing the load factor down to 79.3 percent from a record 81.2 percent a year earlier, it said in a statement.

In addition to fuel costs and a slowing economy, the “Arab Spring” political uprisings also hurt demand in Libya, Egypt, Tunisia and Yemen, while Japanese traffic was subdued after the earthquake and tsunami earlier in the year, Clark said by phone.

Fluctuating exchange rates also clipped earnings, and the airline added 3,400 more staff. Cargo volumes were flat, and though sales rose 16 percent to 29.9 billion dirhams, much of the gain came in surcharges used to pass on some kerosene costs.

Emirates has succeeded in growing its business by adding aircraft and routes while maintaining healthy load factors and ticket prices, “all to have that removed from the bottom line because of fuel,” Clark said. “We were of the opinion that we could manage the business without being over exposed to over- hedging and getting involved in too many derivatives,” he added.

Volatile Pricing

While Singapore Air said today that forward prices for jet fuel “remain high and volatile,” carriers should count themselves fortunate to be avoiding losses in the current environment, aviation analyst John Strickland said.

“They’re still producing profits when many airlines are struggling, and that in itself is a positive thing,” said Strickland of London-based JLS Consulting Ltd.

The slump comes as Emirates builds the largest fleet of Airbus SAS A380s in a drive to establish Dubai as a long-haul travel hub and win passengers from Air France-KLM (AF) Group and Deutsche Lufthansa AG. (LHA) Clark said he’ll stick with the strategy.

Emirates has 90 superjumbos, with 17 in service at the end of October, and is targeting a total of 120. The overall fleet features 161 Airbus and Boeing jets, including 10 planes delivered this fiscal year, with around 190 on order worth in excess of $60 billion, 13 of which are due by March 31.

The carrier has commenced routes to Geneva, Copenhagen and St. Petersburg, Russia, since April and will add eight more in the next few months, flying to Baghdad from Nov. 13 and Rio De Janeiro, Buenos Aires, Dallas, Seattle, Dublin and Lusaka in Zambia and Harare in Zimbabwe starting in early 2012.

“There will be good years and bad years, but we’ll continue our plan to grow,” Clark said. “Our cash remains positive, so we’re able to finance our aircraft. The real inhibitor is fuel. Everything else we seem to be managing.”

To contact the reporters on this story: Tamara Walid in Abu Dhabi at twalid@bloomberg.net; Robert Fenner in Melbourne at rfenner@bloomberg.net

To contact the editors responsible for this story: Chad Thomas at cthomas16@bloomberg.net; Neil Denslow at ndenslow@bloomberg.net

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