How Oil Prices Will Affect Airline Stock Performance Going Forward

by Trefis Team
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Oil prices have fallen from a 52-week high of 76 dollars per barrel to almost 54 dollars per barrel in recent times.  This represents around a 28% fall.  With this fall airlines such as American, Delta, and Southwest have all seen their stocks rise in recent weeks as investors have taken a liking to the airline industry once more.

You can use our interactive dashboard How Oil Will Affect Airline Margins to modify key drivers and visualize the impact on Airlines.

Airlines have increasingly been tightening their cost structures over the past quarters as oil prices have risen. This helped them weather the price increases from oil far better than expected, leading to margin declines being relatively benign. Furthermore, with improved routes and improved logistical efficiencies airlines should increasingly see improved margins as the tailwind from falling oil prices help the industry, during the coming quarters, with the recent decline in the price of oil.

A key part of why airlines have done so well in recent times is consumers have been opening up their wallets on the back of increased consumer confidence. With the falling prices and the coming holiday season, you could see the increased travel translate into higher earnings for the coming quarter.

Issues still remain with aging fleets, and what many consider bloated networks, which are still considered inefficient, despite consolidation. Should airlines decide to reform these aspects of the business they will increasingly have to take on debt, which they may not want to take on. Alternatively, many of these airlines are carrying large amounts of debt already on their balance sheet. These structural problems certainly are weighing down  margins and should continue to do so in the future. Furthermore it should be noted that oil prices may head back up in the coming months with lower oil prices increasingly threatening shale drillers and OPEC showing signs of production cuts. With an overall improving macro-economic scenario, the airline stocks certainly offer better value than previously.

 

 

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