Why profits are important
High revenue growth shows demand for a company’s business and its ability to earn revenues year after year. However, what really matters to investors is how much of that trickles down to profits. In this article, we will look at whether investors are benefiting from all this growth or whether they are paying for all this growth.
Fuel is one of the major input costs for any airline. From $105 per barrel in July 2014 to an average of $66.70 per barrel for 2015, falling fuel prices have brought a sigh of relief to airlines in the last two years.
Airlines have reaped huge benefits from this slump in the form of lower input costs and improved profitability. As a result, most airlines have seen their margins expand.
- United Continental’s (UAL) margin expanded by 8% to 19.3% in 2015
- American Airlines’ (AAL) margins expanded by 8% to 23% in 2015
- Delta Air Lines’ (DAL) margins expanded by 3% to 21% in 2015
- Alaska Air Group’s (ALK) margins expanded by 7% to 30% in 2015
- Southwest Airlines’ (ALK) margins expanded by 7% to 25% in 2015
- JetBlue Airways’ (ALK) margins expanded by 10% to 24% in 2015
- Spirit Airlines’ (SAVE) margins expanded by 6% to 27% in 2015
Can they expand further?
Any further expansion in margins is directly linked to a further decline in crude prices. However, investors should remember that analysts are estimating margins to have peaked. Crude prices are also expected to rise by 2H16.
Also, it is only a matter of time before fuel prices rebound as important economic production starts falling. Such events should adversely impact margins.
Investors can gain exposure to airline stocks through the SPDR S&P Transportation ETF (XTN).