Airlines Take Flight As Fuel Prices Hit Five Month Low

LCC: US Airways Group New US Airways Group logo
US Airways Group New US Airways Group

The airline industry has been reeling under the pressure from rising jet fuel prices which spoiled the first quarter’s earnings for most of the airlines. Amidst climbing fuel prices, the IATA (International Air Transport Association) also lowered its global airline profit forecast for 2012 from $3.5 to $3 billion. However, the recent turn around in the fuel prices will give a sigh of relief to the airlines. The markets cheered the airline stocks as the WTI crude oil fell 14% to $91/barrel in the first three weeks of May itself. Delta Air Lines (NYSE:DAL) and United Continental (NYSE:UAL) gained close to 4.5% each while US airways (NYSE:LCC) shot up by 6.5%.

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The steep fall in the crude oil prices this month must be a pleasing sight for the airline carriers. The average crude oil price has fallen from $103 in Q1 to $101/barrel so far in this quarter. Even a cent per gallon change in jet fuel prices translates into substantial benefits for the carriers.

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Since US Airways doesn’t hedge its fuel consumption, it will be one of the biggest beneficiaries of this oil price correction. It is estimated that one cent per gallon fluctuation in aviation fuel prices would impact its fuel expense by $15 million this year. United Continental may also see significant cost savings as its fuel bill would change by $9.5 million with every cent/gallon change in jet fuel prices this year. The sensitivity of the fuel expenditures towards the Trefis stock price estimate can be seen through the interactive interface below:

As the fuel prices reached uncontrollably high levels in February this year, the airlines lowered their capacity growth forecasts. Delta Air Lines announced plans for 3-4% reduction in capacity, up from 2-3% stated earlier. Southwest also deferred the delivery of 30 Boeing 737-800aircraft by 4 years to save $1 billion. If the oil prices stabilize at sub $100 levels, the airlines may make a comeback in the remaining year. Buoyed by rising travel demand, they would also want to re-think their growth strategy in the near future.

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