uploads/2019/04/Chart-2-Oil-Price-1.png

Moderate Oil Prices Could Support UAL’s Q1 Profitability

By

Updated

Oil prices moderated

WTI oil prices fell ~17% from their peak of $76.40 per barrel on October 3 to $63.58 on April 11. As fuel costs constitute a significant cost component for airline companies, a fall in crude oil prices could boost United Airlines’ (UAL) profitability in the first quarter.

Oil prices remained slightly low in the last quarter compared to the same period of the previous year. During the first quarter of 2018, WTI oil prices mainly traded in the range of $60–$70 per barrel. However, in the first quarter of 2019, prices kept moving between $50 and $60.

Article continues below advertisement

Oil prices were on the rise from the beginning of 2018 until early October due to speculation about stricter sanctions on Iranian oil exports from the US government, which could have triggered a massive supply shortage. However, President Donald Trump’s administration provided temporary waivers to a few countries to continue their oil imports from Iran, which avoided fears of a supply crunch.

For the first quarter, United Airlines expects the adjusted average price per fuel gallon to be $2.00–$2.05. Its first-quarter guidance range depicts a YoY decrease from the average price of $2.09 per gallon in the first quarter of 2018.

United Airlines’ first-quarter estimate is also much lower than the average fuel cost of $2.25 per gallon that it incurred during 2018. Last year, the average fuel cost of $2.25 per gallon was 29.3% higher than $1.74 per gallon in 2017.

Higher oil prices hurt profitability

Last year’s higher oil prices led to a rise of ~30% in most airline operators’ 2018 fuel costs, which hurt their profitabilities. United Airlines’ 2018 adjusted pretax margin contracted 80 basis points to 7.7%.

Among major US carriers (IYT), American Airlines (AAL), Spirit Airlines (SAVE), and Delta Air Lines (DAL) reported contractions of 340 basis points, 180 basis points, and 130 basis points, respectively, in their adjusted pretax margins.

Advertisement

More From Market Realist