SINGAPORE Airlines (SIA) sees continued demand from business travellers despite a slowdown in the world economy, but it expects margins to be squeezed by sky-high fuel costs.

SIA, the world's No. 2 airline by market value, said yesterday that it was still looking to expand through acquisitions,but saw hurdles to buying controlling stakes in airlines from emerging-market countries.

The group, 55-per-cent owned by Temasek Holdings, reported a 15 per cent drop in first-quarter earnings on Monday due to costlier jet fuel, but earnings from partners helped it to beat market expectations.

"So far, as we can gauge by the forward demand situation, it's holding up," SIA chief executive Chew Choon Seng told reporters on the sidelines of a shareholder meeting.

"We don't see any signs of corporate travel fading away suddenly. There is still business going on around the world."

Shares of SIA were down 0.4 per cent by 12.30pm, paring losses after falling as much as 1.7 per cent in early trade.

The national carrier, known for its 'Singapore Girl' stewardesses, relies heavily on first hand business-class passengers, who generate about half of its sales.

It has suffered five straight months of falling combined passenger and cargo loads, as of June, as demand failed to keep pace with higher capacity that was partly boosted by the delivery of five A380 superjumbos.

Analysts paint a gloomy picture for airlines in general. In a note to investors, Merrill Lynch analyst Paul Dewberry reiterated his negative view of SIA, rating the stock "underperform".

He said: "With air-travel demand softening around the world, we expect that the lack of pricing power will continue, leading to further erosion of profits as costs rise."

SIA, which hedges between 30 and 60 per cent of its fuel needs, expects pressure on its margins as jet fuel continues to trade near the peak of US$181 (S$246.70) a barrel earlier this month.

"Given what we have seen unfolding in the global economy and the pressure on costs for fuel, I think the operating margin is going to be narrower," said Mr Chew. "We have already seen signs of it."

Despite its failure to take a stake in China Eastern Airlines earlier this year, SIA chairman Stephen Lee said it will continue to look for acquisitions, but noted that restrictions on airline ownership in emerging markets made this difficult.

"In this industry, majority controlling stakes are actually not available many times. Some
of the developing countries have fairly restrictive policies regarding ownership of airlines, for instance, in India," said Mr Lee at the meeting. -- REUTERS