The airlines’ profits in the short term will likely glide higher on lower crude oil prices suppressed by growing oil production in the US. In its short-term energy outlook released January 7, the US Energy Information Administration (EIA) forecasts average Brent crude oil prices to fall steadily from $109 per barrel in 2013 to around $102 per barrel in 2015.  The agency attributed this steady decline in future oil prices largely to rapidly rising crude oil production in the US, driven by higher drilling efficiency and well productivity at many tight oil and shale gas fields. The EIA estimates that over the next two to three years, US crude oil production will rise steadily from around 7 million barrels per day currently to its historical high of 9.6 million barrels per day seen in 1970.  In all, for airlines, this higher crude oil production in the US will work to lower fuel costs and raise profits.
In a measure of just how dependent airlines are on fuel prices, fuel costs constituted over 35% of total operating costs of all major airlines including Delta (NYSE:DAL), United (NYSE:UAL), Southwest (NYSE:LUV), Alaska (NYSE:ALK) and JetBlue (NASDAQ:JBLU) last year. Due to this high share of fuel costs in their total operating costs, the airlines will significantly benefit from lower fuel prices in the coming years.
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This Rapid Near Term Growth In US Oil Production Was Largely Unexpected
A few years back crude oil production in the US was expected to grow at more moderate rates. However, driven by increasing adoption of new technologies like fracking and horizontal drilling, growth in oil production in the country has surpassed expectations. Oil production began to grow rapidly from around 2011. During 2011 and 2012, US crude oil production grew at a compounded annual growth rate of nearly 9%, up from 4.6% in 2009 and 2010.  The growth figure for 2013 is also expected to have been in line with those in recent years.
Backed by these strong trends, the EIA revised upward its forecast for future growth in US oil production. The agency now expects the strong growth in US oil production to persist through 2016. In turn, this positive forecast revision forced us to revise downward near-term fuel costs for airline stocks under our coverage. Consequently, our revised price estimates for Southwest, Delta, United, Alaska and JetBlue stands revised upward by around 5-10% and are now approximately in line with their current market prices.Notes:
- US EIA’s short term energy outlook, January 7 2014, www.eia.gov [↩]
- US EIA’s presentation on outlook for US shale oil and gas, January 4 2014, www.eia.gov [↩]
- EIA’s international energy statistics-US crude oil production, January 8 2014, www.eia.gov [↩]