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Falling Oil Prices Could Boost Airlines’ Profits and Share Prices

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Nov. 23 2018, Updated 3:25 p.m. ET

Heightened oil prices hurt profitability

Oil prices surged continuously from the beginning of 2018 through mid-October. Because oil expenses are a significant cost for airlines, rising oil prices hurt airlines’ profitability as well as their share prices.

American Airlines (AAL), Delta Air Lines (DAL), United Continental (UAL), and Alaska Air Group (ALK) have recorded over 30% increases in their respective third-quarter fuel costs, significantly affecting their pretax operating profits.

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In the third quarter, American Airlines’ fuel cost increased 37.8% to $2.28 per gallon from $1.66 in the previous year’s third quarter. The company’s non-GAAP pre-tax income declined 34.8% year-over-year or YoY to $341 million. Delta Air Lines’ third-quarter fuel cost per gallon surged 32.1% YoY to $2.22 while non-GAAP pre-tax income declined 5.6% to $1.6 billion.

United Continental reported a 36.5% jump in fuel cost per gallon, reaching $2.32. The company’s pre-tax operating profit grew 1.8% despite an 11.4% rise in revenues. Alaska Airlines’ fuel cost per gallon soared 29.4% to $2.33 while its pre-tax operating profit declined 31.9% to $284 million.

Oil prices cooled off

Since early October, oil prices have been bearish as sanctions levied by the US government on Iran have been softer than expected. Prices are now down 26% from their peak of $76.40 per barrel on October 3 to $54.63 on November 21.

Earlier, analysts had been expecting stricter sanctions from the United States against Iran and had anticipated a resulting massive crude oil supply crunch. However, the United States allowed temporary waivers to eight countries, including India and China, which are the major importers of Iranian oil.

Weaker Iran sanctions, along with the increased output from OPEC, have staved off fears of a supply shortage, cooling oil prices in the international market. Lower oil prices have raised hopes of airline operators increasing their profitability in the coming quarters, which has been causing a surge in airline stocks (IYT) over the past few weeks.

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