uploads///Fuel

Analyzing Crude Oil’s Impact on Airlines’ Fuel Costs

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Sep. 4 2017, Updated 7:36 a.m. ET

Crude oil prices

After falling to lows of $40 per barrel on oversupply concerns, crude oil prices rose to $50 per barrel on news of pipeline blockades in Libya hitting the crude market. The blockade could lead to ~4.0 million barrels less production every day from OPEC.

However, Hurricane Harvey—which has caused massive destruction along the Gulf Coast—has resulted in crude oil prices falling to $47 per barrel. Floods are expected to advance from Texas to East Louisiana. Texas has a capacity of ~5.6 million barrels per day and Louisiana of 3.3 million barrels per day. The expected loss in production has led to falling crude prices.

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Impact on airlines

Though crude oil prices have recently fallen, they’re still higher than the $42-per-barrel average price we saw in the second quarter. This difference means airlines may witness a rise in fuel expenses similar to what we saw in the first quarter.

Crude prices had recovered in 1Q17. As a result, most airlines’ fuel costs rose significantly. Delta Air Lines’ (DAL) fuel costs rose 26.4% YoY to $1.6 billion. American Airlines’ (AAL) fuel cost rose 37.8% YoY to $1.7 billion, and United Continental’s (UAL) fuel costs rose 28.1% YoY to $1.6 billion. Alaska Air’s (ALK) fuel cost rose 103% YoY to $339 million, including the impact of its Virgin America merger. Southwest’s fuel cost rose 13.6% to $959 million. JetBlue’s (JBLU) fuel cost rose 50% to $323 million. Spirit Airlines’ (SAVE) fuel expense rose 62.2% YoY to $139 million.

Investors can gain exposure to the industry by investing in the SPDR S&P Transportation ETF (XTN), which invests ~22.1% of its holdings in airlines. Next, we’ll analyze airlines’ guidance on the industry’s most-watched metric.

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