Generally, jet fuel prices account for the majority of total expenses of the air carriers. The lower the oil price, the better it is for these companies. But in reality, oil prices act as an indicator of the general economic conditions. Lower oil prices indicate a slowing economy and the consequent fall in global air travel demand.
Global economic uncertainties make matters worse. European problems are intensifying, and the economy at large already faces threats of another recession. In such a scenario, even the warning of a drop in air travel demand would jeopardize airline stocks.
Major U.S. airline shares plunged yesterday on falling oil prices. Spirit Airlines Inc. (SAVE) suffered the most from these negative sentiments as its share price dropped more than 7%. Stocks of United Continental Holdings Inc. (UAL) and Alaska Air Group Inc. (ALK) fell more than 6% and the share price of Delta Air Lines Inc. (DAL) dropped nearly 2%.
The drop in demand is expected to hurt airline traffic in the near term, resulting in lower profits. Given the weak macroeconomic data points, we believe the carriers are ready to accept the burden of rising fuel prices as they are well positioned to endure the current crisis. Passing on the increased cost to customers in the form of fare hikes and efficient use of fuel-hedging strategies are helping them to combat the rising fuel prices.
Apart from cutting capacity, air carriers are adding novel features to their services and introducing new products. These measures will fuel revenue growth and reduce non-fuel costs, thereby driving future profitability.
We are currently maintaining our long-term Neutral recommendation on Delta, United Continental, Southwest and JetBlue. For the short term (1–3 months), these stocks retain the Zacks #3 (Hold) Rank.
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