First Quarter Woes: What Do We Make Of Singapore Airlines' Earnings Miss?

Singapore-based flag carrier Singapore Airlines (NYSE: SINGY) reported a sharp first-quarter earnings miss in the last week of July, with net profits falling below half of what analysts had penciled in for the company. The carrier cited higher operating expenses and lower interest income, which could not be offset by the company attaining lower costs from prudent hedging in fuel markets.

Despite a multitude of setbacks, Singapore's operational performance was ultimately strong, with passenger volumes rising more than 5% year-on-year, with cargo traffic rising by a similar amount. The company saw modestly increased yields, and rhetoric from the company's leadership team remained positive despite financial difficulties, according to reports from CNBC. Let's take a step back and analyze the firm's performance in Q1 and discuss the implications this performance could have on the company's H2 outlook.

Poor Cost Optimization Was A Key Driver

Singapore Airlines enjoyed somewhat robust operational performance, but its profits fell short of last year's figures for a few key reasons. It is important to note that the company did generate more revenue during the first quarter of fiscal year 2025/26 than it did the year prior, by around 1.5%, according to company financial reporting.

However, the company's total expenses increased significantly by around 3.2% overall, demonstrating that the firm's profitability challenge comes clearly from the cost side. Within costs, there are both fuel costs and non-fuel costs, with the former being any airline's (and Singapore's) largest individual operating expense. The company's largest source of struggles came within its fuel hedging division. In a statement, the airline had the following words to share regarding its struggles:

"Net fuel cost was lower by 7.9% (-$108 million), mainly from the 16.9% reduction in fuel prices (-$252 million), which was partly offset by the higher volume uplifted (+$70 million) and a fuel hedging loss against a gain last year (+$109 million)."

What Exactly Is Fuel Hedging?

Fuel hedging is a unique practice airlines use to hedge the company's cost risk against fluctuating fuel prices. The typical instruments used by fuel hedgers include derivatives like options, swaps, or futures. Singapore Airlines, however, achieved poor results from this practice earlier this year, as derivatives contracts prevented the carrier from benefiting from lower fuel prices. The best example of this can be seen on the company's income statement:

As the airline's operating profit was not all that far off from last year's figure, it is not surprising that fuel hedging (a loss that would be tabulated as a non-operating expense and thus included in Net Profit calculations) accounts for a large portion of why the airline's net profit underperformed last year's figure so significantly. Many industry observers had not anticipated such a weak performance from the airline's fuel hedging division.

Singapore Airlines' competitors also faced similar struggles when it came to managing this year's fluctuating fuel prices. However, some found success in the practice. Ryanair's leadership team made it clear that effective fuel hedging was a key driver of the carrier's strong performance.

How Has The Airline's Stock Performed?

Up until the carrier reported its earnings at the end of July, Singapore Airlines' stock had been enjoying a bullish run. Shares rose nearly 30% from January through late July, before the company's earnings miss set off a week-long tumble. Shares are still trading up 10% YTD.

The company, despite seeing shares rise comfortably over the course of an otherwise difficult year, appears to have lost some investors' confidence. The stock has suffered multiple contractions, with price-to-earnings ratios falling from around 9.5 at the start of the year to just 7.4 in Friday trading.

Among other operational challenges, it does appear that investors have lost some confidence in the company's financial prospects, despite a strong operational picture. Earnings are still forecasted to grow, with a forecast price-to-earnings ratio exceeding 18.