Times have got increasingly better for airline companies as Brent crude oil hit a new 14 month low on easing supply concerns. Notably, falling crude oil prices indicate lower jet fuel costs, thereby boosting the profitability of airline companies.
On Monday, the Brent crude oil price fell by $1.93 to $101.60 while the West Texas Intermediate (WTI) crude oil slipped 94 cents to $96.41 at the end of the day as Libya accelerates its oil production and supply concerns over conflict in Iraq and Ukraine eases. The declining oil prices drove most of the airline stocks on Monday’s trading session. Notably, United Continental Holdings (up 4%), American Airlines Group (up 3.75%) and Southwest Airlines (up 3.6%) were some of the major gainers.
Drop in Crude Price: A Blessing
The profit outlook of airline stocks depends largely on fuel prices, the major variable component in the industry. According to the International Air Transport Association (:IATA) total fuel cost for aviation companies will touch $212 billion in 2014 accounting for almost 30% of the overall operating cost.
Hedging strategies are frequently used by airline companies to cope with rising fuel prices. The carriers use a combination of calls, swaps and collars at varying WTI crude-equivalent price levels to hedge. However, the passenger carrier’s, which have cut their oil hedges will benefit most from the falling price trend.
Strong Q2 Earnings
The airline sector had witnessed a soft first quarter due to severe winter. However, the second quarter earnings have looked much more promising as the current momentum in the macro economy was complemented by strong fundamentals within the sector.
Most of the traditional and regional U.S. carriers have managed to beat our second quarter 2014 earnings estimate with only JetBlue reporting in line earnings, while Skywest missed the same. Solid demand particularly from the business and leisure group of travellers drove the result positively. The strong results have prompted bellwethers like United Continental and American Airlines to announce stock buybacks.
3 Airline Stocks to Buy Now
United Continental Holdings Inc. (UAL) is one of the major carriers in the U.S. and operates through its mainline and regional partners. It operates in the United States, Asia-Pacific, Europe, Africa, the Middle East and Latin America and has an approximate fleet of 700 aircrafts.
The Zacks Consensus Estimates for third-quarter 2014 is $2.29, representing a robust year over year growth of 51.88%. The company registered an average positive earnings surprise of 3.95% over the trailing 12 months. This Chicago-based airline currently has a P/E ratio of 10.74 and is trading at a significant discount to the industry average of 20.20. United Continental Holdings spots a Zacks Rank #1 (Strong Buy).
Southwest Airlines Co. (LUV) is a Dallas-based airline that provides low-cost passenger air transportation services in the U.S. It primarily provides short-haul, high frequency, point-to-point airline services covering many secondary or downtown airports such as Dallas Love Field, Houston Hobby, Chicago Midway, Baltimore/Washington International, Burbank (Los Angeles), Manchester (Boston), Oakland and San Jose. As of Jun 30, 2014, Southwest operated 695 Boeing aircraft and served 93 destinations in approximately 40 states.
The Zacks Consensus Estimates for third-quarter 2014 is 48 cents, representing a year over year growth of 41.54%. The company registered an average positive earnings surprise of 12.84% over the trailing 12 months. Southwest Airlines currently has a Zacks Rank #1 (Strong Buy).
Spirit Airlines Inc. (SAVE) is a low fare airline based in Miramar, FL. The carrier operates 270 daily flights to 55 destinations across the U.S., Latin America and the Caribbean. As of Jun 30, 2014 the company had a fleet of 57 single aisle aircrafts consisting of Airbus planes.
The Zacks Consensus Estimates for third-quarter is 98 cents, representing a year over year rise of 23.84%. The company registered an average earnings surprise of 9.20% over the trailing 12 months. Spirit Airlines holds a Zacks Rank #1 (Strong Buy).
What Lies Ahead?
According to International Energy Agency (:IEA) crude oil price is expected to remain subdued going forward owing to strength in global oil supplies. The soft crude price will act as a catalyst behind airline companies’ further rise in profitability.