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How Much Longer Will Low Oil Prices Benefit Airlines?

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Fuel prices continue to fall

Fuel prices have fallen sharply in the last 15 months from a high of $105 per barrel last July to levels below $40 this year. The fall has continued in October, as flat oil prices and large fluctuations in the strength of the dollar continued. This is a big sigh of relief for airline companies, as fuel prices form a large part of their costs and thus have a substantial effect on their profitability.

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Airlines reap benefits

Airlines have reaped huge benefits from lower input costs and better profitability. They have taken advantage of this situation by using the cash generated for initiating fleet expansion and restructuring plans and by rewarding their investors. However, most of them also suffered losses due to hedging.

Hedging losses dampen the gains

Most of the airlines use hedging as a tool to protect them against fuel price fluctuations, but the sharp and unanticipated fall in oil prices caused many to suffer huge hedging losses. The only airline company to benefit from this price slump was American Airlines, which followed a no-hedging strategy.

Expectations

Oil prices are expected to continue to remain at lower levels for the rest of the year as well as during the first half of the coming year. The Organization of the Petroleum Exporting Countries did not show any inclination towards curbing production. The airlines can thus expect to generate strong cash flows and use them for expansion plans and shareholder returns.

Investors can gain exposure to these airlines by investing in the SPDR S&P Transportation ETF (XTN), which invests 3.1% in Southwest (LUV), 2.7% in Delta (DAL), 2.6% in American Airlines (AAL), 2.6% in United Continental (UAL), 2.6% in Alaska Airlines (ALK), 2.5% in JetBlue (JBLU), and 2.1% in Spirit (SAVE).

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