Lower Current Crude Oil Prices Weaken Air Travel

In general, prices of jet fuel account for most of the total expenditures of air carriers. As such, when current crude oil prices are lower, it is more beneficial for the airline companies. However, oil prices are also an indicator of the economy’s overall condition. This means that lower oil prices suggest a slowing down of the economy, and the resulting drop in demand for air travel.

Uncertainties on the global economy worsen the situation. Problems in Europe are growing, and the general economy is faced with threats of a possible recession. With these conditions, even a hint of reduction in demand for air travel will hurt airline stocks.

Shares of major USA-based airlines recently dropped because of declining crude oil prices. One of the most affected, Spirit Airlines, was hit with a fall in its shares by over 7%. The stocks of Alaska Air Group and United Continental declined by over 6%. The price per share of Delta also fell by almost 2%.

JetBlue Airways Corporation, Alaska Air Group and Southwest Airlines are among the air carriers that are affected the least. The prices of their shares fell by only 0.29%, 0.46% and 0.88%, respectively.

In the near term, the fall in demand is anticipated to affect airline traffic and lead to decreased profits. With the poor macroeconomic news, analysts believe that the air carriers are prepared to take the difficulty of increasing fuel prices since they are in a good position to bear the present crisis. Passing the rising cost to consumers through increasing consumer fares and an economical utilization of fuel-hedging techniques are aiding them to fight increasing fuel prices.

Aside from decreasing capacity, these companies are putting new features to their service and launching new products. All these will boost profit growth and decrease non-fuel expense, which will push profitability in the future.

By: Chris Termeer