Airline stocks take off as oil plummets

If fuel prices remain low, the cost benefits will be reflected directly in carriers' bottom lines.

By Trefis May 30, 2012 9:50AM
TrefisAirline stocks are continuing their gains as they cheer the drop in jet fuel prices. US Airways (LCC) shares jumped some 20% in the past five trading sessions, while Delta Air Lines (DAL) gained about 13%, United Continental (UAL) 11%, Southwest (LUV) 7%, and Alaska Airlines (ALK) about 5%.

Jet fuel prices fell to $2.92 a gallon on May 23, a 14% drop from this year's high of $3.39 a gallon on February 24.

If fuel prices stay at current levels, their estimate of $3.19 per gallon by the 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 per gallon. Should it remain the same the entire year, it would mean a 19 cent a 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 levels close to 2011.

In that case, an average fuel price of $3 a gallon can result in fuel cost savings worth $3 billion this year excluding hedging initiatives. Further, the magnitude of savings can expand further if fuel prices maintain current levels.

US Airways Fuel Cost as Percent of US Passenger Revenue

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 the second half of 2012 through various derivative contracts and expects fuel cost at $3.35 per gallon excluding hedges for 2012, or 43 cents above current market price.

Alaska expects its fuel bill for this year to be 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 fuel prices maintain lower levels, these cost benefits would directly reflect in the airlines' bottom-lines.

United Continental Intl Fuel Expenses as percent of Intl Passenger Revs

See our complete analysis for US Airways | United Continental | Alaska Air Group | Delta | Southwest

More from Trefis



Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

125 rated 1
267 rated 2
455 rated 3
612 rated 4
682 rated 5
695 rated 6
632 rated 7
472 rated 8
279 rated 9
147 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.