Airlines are continuing their gains as they cheer the fall in jet fuel prices. US Airways (NYSE:LCC) retained the top gainer spot with 11% upside followed by United Continental (NYSE:UAL), Alaska Airlines (NYSE:ALK), Delta Air Lines (NYSE:DAL) and Southwest (NYSE:LUV) which managed close to 5% appreciation in their stock. The jet fuel prices have fallen to $2.92/gallon on May 23, a 14% drop from this year’s high of $3.39/gallon on February 24.
If the fuel prices stay at current levels, the jet fuel price estimate of $3.19/gallon by IATA (International Air Transport Association) for this year would need serious revision. Below we present our analysis on the magnitude of savings that the airlines can realize through this fall.
According to the first quarter statistics shared by Bureau of Transportation Statistics, the average fuel price stands at $3/gallon. Should the fuel price maintain this price for the entire year, it would mean a 19 cent/gallon savings compared to the IATA estimates for 2012. Since airlines are expecting marginal capacity additions this year for which additional fuel requirements may get balanced by deployment of fuel efficient aircraft, we expect the overall fuel consumption to maintain close to 2011 levels. In that case, an average fuel price of $3/gallon can result in fuel cost savings worth $3 billion this year excluding hedging initiatives. Further, the magnitude of savings can expand further if the fuel prices maintain the current levels.
The extent of appreciation in stock prices recently gives a fair estimate of the each carrier’s share of these fuel benefits. US airways has kept itself aloof from fuel hedging programs thereby resulting in substantial benefits for the carrier with every minor correction in the fuel price. United has hedged 36% of the expected fuel consumption for H2 2012 through various derivative contracts and expects fuel cost at $3.35/gallon excluding hedges for 2012, 43 cents above the current market price. Alaska expects fuel bill for this year to get impacted by $9.5 million with every cent/gallon of fuel. Fuel has been the prime factor driving the profitability of the airlines. IATA’s revised global profit estimates from $3.5 billion to $3 billion for 2012 were also a result of fuel price headwind. Should the fuel prices maintain lower levels, these cost benefits would directly reflect in airline’s bottom-line.