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.
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.