With oil prices trading above the $100/barrel benchmark (first time since June), airline stocks are once again taking it on the chin. Amid positive news of flight additions across all major airlines, the surge in oil prices comes as a massive jolt for the U.S. carriers, resulting in the recent selloff in shares.
United Continental Holdings Inc. (UAL) fell 5.6% on Wednesday followed by decreases of 5.2% in AMR Corp. (AMR), 1.8% in Southwest Airlines Co. (LUV) and 2.7% in JetBlue Airways Corporation (JBLU).
Rising oil prices have become a serious problem for the hard-hit airline industry. Since 2002, crude oil prices have been registering new highs thanks to soaring demand from the emerging markets and a weaker U.S. dollar. Fuel expenses now account for approximately 30% of the industry’s costs.
June offered some respite when crude oil prices fell below the $100/ barrel mark given the increase in the U.S. unemployment data, downward revision of payroll data and major drop (11.5%) in China crude oil imports. Air carriers like Delta and JetBlue even managed to bounce back in the third quarter. Delta also showed impressive 51% earnings growth year over year on cost improvement, optimum asset utilization and fare hikes.
However, United and Southwest Airlines failed to register any positive change. United Continental remained impacted by merger-related expenses, while negative impacts of fuel price hedging clouded Southwest’s earnings.
But overall, there was positive momentum across the industry that led to IATA’s (International Air Transport Association) improved profit outlook for this year that reflected a 73% increase.
Now, as oil prices have shot up again, the airline carriers see serious threats ahead. We predict fluctuations in oil prices over the short term, but only an upward movement in the long run. As a result, the airline companies will have to fight back and continue to bank on strategies like fare hikes, fuel hedging and efficient asset utilization.
Consequently, we remain cautious on these stocks and continue to maintain our long-term Neutral rating on Delta Air Lines, United Continental, Southwest Airlines and JetBlue.
