Airline 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.

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.

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

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