uploads///Chart  Oil Price

Falling Oil Prices to Boost Airline Profitability in 2019

By

Jan. 2 2019, Published 6:28 p.m. ET

Oil prices cooled off

Since October 2018, the market has been bearish on oil prices, as the sanctions levied by the Trump administration on Iran were softer than expected.

Earlier, analysts had been expecting stricter sanctions by the US government on Iran and had therefore anticipated a massive crude oil supply crunch. However, President Donald Trump provided temporary waivers to eight countries, including India and China, which are the major importers of Iranian oil.

Article continues below advertisement

Apart from this, with the United States now producing more oil than Russia and Saudi Arabia, concerns over the global supply glut are also easing. As a result, traders have sold oil futures globally, sending WTI prices as low as $45.41 per barrel on December 31 from their peak of $76.40 on October 3.

Reduced oil prices have raised hopes that airline operators (IYT) will increase their profitabilities in the coming quarters.

Profits shrink on high oil fuel costs

Oil prices soared continuously from the beginning of 2018 through early October. As fuel expenses reflect a significant cost for air carriers, rising oil prices hurt their profitabilities.

Delta Air Lines (DAL), American Airlines (AAL), 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.

Article continues below advertisement

In the third quarter, Delta Air Lines’ fuel cost per gallon surged 32.1% YoY (year-over-year) to $2.22, while its non-GAAP (generally accepted accounting principles) pretax income fell 5.6% to $1.6 billion. American Airlines’ third-quarter fuel costs increased 37.8% to $2.28 per gallon from $1.66 in the previous year’s third quarter. The company’s non-GAAP pretax income fell 34.8% YoY to $341 million.

United Continental’s fuel cost per gallon jumped 36.5% YoY to $2.32 in the third quarter. However, due to its efficient cost management, the company managed to report a YoY increase of 1.8% in its pretax operating profit. Alaska Air Group’s fuel cost per gallon soared 29.4% to $2.33, while its pretax operating profit fell 31.9% to $284 million.

Advertisement

More From Market Realist