What Airline Stocks Are Benefiting From Lower Oil Prices?
Over the last 18 months, the price of WTI crude oil has dropped from over $100 a barrel to less than $30 a barrel. Although this price drop hurts the businesses involved in the petroleum industry, there are several businesses that can benefit from the huge reduction in the price of oil.
Petroleum is a major component of plastic, and plastic is used in numerous products, such diverse items as dishwashers, microwave ovens, computers, DVDs, pipes, toys, and automobiles. So the price drop of petroleum reduces the cost of materials for plastic manufacturers, which can increase their earnings and allows them to pass on cost savings to the product manufacturers. Then the end-product manufacturers benefit from the lower cost of plastic for their products.
Of course, airlines benefit from lower fuel prices (assuming they didn't hedge their fuel purchases too soon). Jet fuel is produced from oil, so when the price of oil drops, the price of jet fuel drops. Since fuel is the biggest expense for airlines, other than labor, the savings from fuel costs can be significant and provides greater earnings for the airlines.
Let's get back to hedging. In simple terms, airlines can lock in the price of future purchases of fuel. So if an airline hedges, and the price of fuel goes up, the airline gets to buy its fuel at that lower price that it locked in. But if the price of fuel drops after hedging, then too bad for the airline.
Unfortunately, many of the major airlines did hedge at much higher prices. Management of these airlines assumed that when oil was around $40 or $50 a barrel, it was time to hedge. Alas, their bottom fishing was wrong.
However, there are a couple airlines that made some right decisions.
American Airlines and US Airways merged a couple years ago to become American Airlines Group Inc (NASDAQ: AAL). At that time, management decided to follow in the footsteps of US Airways and eschew hedging. This turned out to be a superb decision, as oil has declined since that point in time, and American is taking advantage of the low prices.
American trades at six times both trailing and forward earnings. For the latest reported quarter, earnings skyrocketed by almost 80% on a slight reduction in revenues. This growth in earnings has allowed the airline to acquire more fuel efficient jets, greatly reducing the age of its fleet.
The price to sales ratio is a very favorable 0.62, and the the price to earnings growth ratio is an extremely favorable 0.46. The stock pays a yield of 1.0%.
Another airline has an interesting twist on fuel savings. Delta Air Lines (DAL) purchased its own refinery a few years ago. Although it had a little bit of a rough start, it has saved the airline a substantial amount of money over the last couple years.
The trailing price to earnings ratio is 13 and the forward P/E ratio is 7. Earnings spiked 268% on flat revenues for the latest quarter. The yield is 1.2%.
Some of these airlines may help your portfolio take off. The airline stocks may suffer a bit of turbulence with the rest of the stock market, but hopefully they will move higher.
Disclosure: Author didn't own any of the above at the time the article was written.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.