Why airlines like Delta are haunted by rising fuel prices

Market Realist

Investing in Delta Airlines: A must-know company overview (Part 9 of 14)

(Continued from Part 8)

Airline fuel prices

All airline companies struggle to manage uncertainty related to fluctuating crude oil prices, which drives their jet fuel costs higher. The industry has seen fuel costs as a percentage of total operating costs increase from 14% in 2003 to 30% in 2013, mainly due to the rise of crude oil prices by nearly five times, from $28.8 in 2003 to $108 in 2013. Due to competitive pressures, airlines are generally not in a position to pass on increases in fuel prices to customers, who demand increased services at competitive prices. Even with a moderate hike in fares, companies can only recover the costs partially, resulting in reduced profitability.

According to the EIA (Energy Information Administration), Brent crude oil prices averaged between $107 and $122 per barrel this year, and they’re expected to reduce to $106 per barrel in 2014 and $102 per barrel in 2015 as supply increases. Total crude oil production in the U.S. is expected to increase from 7.4 million barrels per day in 2013 to 8.5 million barrels per day in 2014 and 9.2 million barrels per day in 2015—the highest annual average production since 1972. The expected decrease in crude oil prices is positive for airline companies, as it translates to reduced fuel costs and higher operating margins.

While mainline companies’ fuel costs hover close to the industry percentage of the total operating cost, low-cost carriers’ fuel cost percentages seem to be higher. Delta’s (DAL) fuel cost comprises 33% of its total operating expense, United’s (UAL) fuel cost is 34% of its operating expense, and American Airlines’ (AAL) fuel cost is 35% of its total operating expense. JBLU and LUV have higher percentages, with around 37% of total operating costs comprising fuel costs. Companies that are able to control their fuel costs are at a competitive advantage.

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