Crude oil price trends
On May 22, crude oil (DBO) rose towards $80.0 per barrel. The surge in the price was due to concerns over dwindling Venezuelan crude output as well as a potential fall in Iranian exports. The deal among the OPEC (Organization of the Petroleum Exporting Countries) and Russia to trim oil supply coupled with a solid global demand has fueled the recent oil price rally.
Brent crude, the worldwide benchmark for oil price, touched $79.85 per barrel on May 22. In the previous week, it topped $80.0 per barrel, the highest since November 2014. US crude also traded at $72.72 per barrel, the highest level since late 2014. President Trump also leveled fresh sanctions on Venezuela after the re-election of its President Nicolas Maduro. This move could further pull down Venezuela’s oil production, which is at its lowest in decades, and in turn, push up oil prices.
Crude oil, airlines, and Boeing
A boom in air travel in emerging economies like China and India has steadily expanded the air passenger market in the past few years. Boeing anticipates India’s domestic air traffic growth to slow down to 12% compared to 20% to 25% in 2015 and 2016. The fuel price growth will, in turn, increase the cost of flying and could discourage air travel.
ATF (aviation turbine fuel) is the single largest input cost for most airlines. Thus, a sharp rise in oil price could certainly increase operating costs and impact margins for airlines around the world. A Forbes report from April 26 stated that the oil price rise will add ~$2.3 billion to the American airlines’ operating costs in 2018.
J.P. Morgan Chase analyst Jamie Baker wrote, “the US airline industry will likely to make capacity cuts following the summer travel season.” The oil price rise would most likely reduce Boeing’s new order prospects for the single-aisle aircraft, its largest market worldwide. Apart from that, the surge in oil prices could also increase the input cost for the world’s largest aerospace company.
Investors looking for opportunities to invest in the US aerospace and defense companies can consider the iShares U.S. Aerospace & Defense ETF (ITA). Among all the ETFs covering Boeing, ITA has the highest weight of 11.4% in the company’s stock. The other major industrial companies in ITA’s holding in descending order are United Technologies (UTX) at 7.7%, Lockheed Martin (LMT) at 7.0%, and Raytheon (RTN) at 6.3%.
In the next part, we’ll go through Boeing’s debt levels and compare them with industry peers.