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.
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.
On October 11, Delta Air Lines released its third-quarter results. The company’s adjusted EPS of $1.83 came in ahead of analysts’ expectations by $0.09 and registered a whopping 16.6% YoY (year-over-year) increase.
Broadcom (AVGO) stock fell ~8.5% after markets closed yesterday following the semiconductor giant's fiscal 2019 second-quarter earnings release. It missed analysts' revenue estimate and cut its fiscal 2019 revenue guidance by $2 billion to $22.5 billion due to sluggishness in its semiconductor solutions business.
The SPDR Gold Shares ETF (GLD), which tracks physical gold prices, has underperformed the broader markets year-to-date, rising just 4.4% compared to the S&P 500’s (SPY) gain of 15.9% as of June 14. The sentiment for gold, however, has been turning around.
Safe havens such as Treasuries and gold were back in favor on June 14 as stocks fell due to rising tensions in the Middle East, concerns over growth, and the looming threat of the US-China trade war. The tech-heavy Nasdaq Composite Index fell 0.67% in the first hour of trading.
Lululemon (LULU) stock rose 2.1% on June 13 in reaction to better-than-expected first-quarter results and an upgraded outlook for fiscal 2019 overall. The company's first-quarter adjusted EPS grew 34.5% to $0.74 on revenue growth of 20.4% to $782.32 million. Analysts had expected EPS of $0.70 and revenue of $755.31 million. Here's why the outlook got an upgrade.
As of 4:40 AM Eastern Time today, US crude oil active futures were at $51.83, ~4% below their closing level in the previous week. If US crude oil prices stay at those levels today, they'll mark their third week of decline in five weeks.
Amazon is discontinuing its Amazon Restaurants service, which has been delivering food for restaurants in parts of the United States. Amazon Restaurants launched in the United States in 2015 and entered the British market the following year. However, it met strong opposition in the British market.