How Crude Oil Prices Impact Airlines’ Fuel Costs

Crude oil prices

Crude oil prices have fallen to ten-month lows of $42.10 per barrel due to oversupply concerns. The latest US government data shows a rise in production of domestic crude. According to the U.S. Energy Information Administration, US domestic output has grown 8% YoY (year-over-year), or 20,000 barrels per day, to 9.4 million barrels per day.

How Crude Oil Prices Impact Airlines’ Fuel Costs

In May, oil prices rose to $51.50 per barrel on the news of OPEC[1.Organization of the Petroleum Exporting Countries] and a few non-OPEC nations agreeing to extend a deal to reduce production by 1.8 million barrels per day until March 2018.

Impact on airlines

For airlines, this decline in crude oil prices is good news, as it means further savings in one of airlines’ major costs—fuel. The benefit is maximal if airlines have no hedges against a crude oil price rise.

The impact was evident in airlines’ 1Q17 earnings results. Crude prices recovered slightly in 1Q17, resulting in most airlines’ fuel costs increasing significantly. Of course, some of this rise in cost is also attributed to a rise in airline fuel consumption.

Delta Air Lines’ (DAL) fuel costs rose 26.4% YoY to $1.6 billion. American Airlines’ (AAL) fuel costs rose 37.8% YoY to $1.7 billion, and United Continental’s fuel costs rose 28.1% YoY to $1.6 billion. Alaska Airlines’ (ALK) fuel costs rose 103% YoY to $339 million (including the impact of the Virgin America merger), and Southwest Airlines’ (LUV) fuel costs rose 13.6% to $959 million. JetBlue Airways’ (JBLU) fuel costs rose 50% to $323 million, and Spirit Airlines’ (SAVE) fuel costs rose 62.2% YoY to $139 million.

Investors can gain exposure to the industry through the iShares Transportation Average ETF (IYT), which invests 24% of its portfolio in airlines. Next, we’ll analyze airlines’ guidance on the industry’s most-watched metric, revenue per available seat mile.