The recent steep drop in oil prices is sure to boost profit
margins for airlines in the fourth quarter. Less certain, however, is if the
decline will last long enough to have a noticeable impact on airline operations
and bottom lines next year.
Crude oil was trading in the low $50s midway through last
week, down about a third from its $76.40 peak on Oct. 3.
The cost of jet fuel has followed suit. U.S. Gulf Coast
pipeline jet fuel peaked at $2.34 per gallon on Oct. 3 before dropping 25%, to
$1.75 per gallon, as of Dec. 12, according to the price reporting firm S&P
U.S. airlines have yet to offer specifics on the savings
they've gained from the price drop. For the most part, those details won't be
known until they report fourth-quarter earnings in January. Still, the carriers
have offered some clues.
For example, in a Dec. 4 Securities and Exchange Commission
filing, Delta said it anticipated 7.5% growth in year-over-year revenue for
December, adding, "When combined with the benefits from the recent
moderation in fuel prices and solid nonfuel cost control, the company is on
track to expand pretax margins in the December quarter."
Other carriers, too, recently updated their guidance on fuel
costs. On Nov. 26, Spirit estimated that its fuel will cost $2.27 per gallon in
the fourth quarter, down from $2.36 per gallon in the third quarter.
The following day, Alaska reduced its fuel-cost estimate for
the fourth quarter from $2.36 per gallon to $2.33 per gallon. Then, on Dec. 12,
Southwest lowered its guidance on fuel cost for the fourth quarter to between
$2.25 per gallon and $2.30 per gallon from its earlier estimate of $2.30 to
$2.35 per gallon.
Drops in fuel expenditures at Alaska and Southwest should be
less precipitous than at several other U.S. airlines, including United, Delta
and American, because Alaska and Southwest hedge fuel, a mechanism that shields
them from volatile leaps in fuel prices but can also result in their paying above
the going rate in a bear fuel market.
The recent plunge in oil prices notwithstanding, airline
fuel expenditures aren't likely to be down on a year-over-year basis in the
fourth quarter. As of Dec. 7, jet fuel prices were 2.3% higher than a year
earlier, according to IATA.
Still, in an industry profit forecast it issued last week,
IATA concluded that cheap fuel should bolster airlines' bottom lines during
2019. The trade group now predicts that global profits will total $35.5 billion
next year, up from an expected $32.2 billion this year.
In a prepared statement, IATA general secretary Alexandre de
Juniac said, "We had expected that rising costs would weaken profitability
in 2019. But the sharp fall in oil prices and solid [gross domestic product]
growth projections have provided a buffer. So we are cautiously optimistic that
the run of solid value creation for investors will continue for at least
IATA now predicts that jet fuel will average $81.30 per
barrel next year, compared with $87.60 per barrel this year. As a whole, the
group noted, North American carriers will benefit more from the price decline
than carriers in other regions, because of low levels of hedging.
Nevertheless, there is doubt about how long jet fuel prices
will stay low. One reason, S&P Global Platts data shows, is the futures
market, where the price of jet fuel is steadily higher for each month between
May and September.
In addition, some stock analysts are predicting a
significant price spike as the international shipping industry ramps up for
stricter fuel-quality regulations that go into effect on Jan. 1, 2020. Those
regulations are expected to increase worldwide demand for low-sulfur diesels,
which compete with jet fuel for production at refineries.
"The industry will feel the impact of higher jet fuel
prices," Cowen Research analysts wrote in a Dec. 3 investor note. "We
expect the world's airlines to try and increase fares, and given this will
impact all airlines, we expect fare increases to be successful."
Conversely, a weakening worldwide economy, combined with
strong crude production, could keep oil prices low.
If jet fuel does stay cheap for a lengthy period, airlines
are likely to realize their biggest profits in the first half of next year,
Airline Weekly editor Seth Kaplan said.
"Beyond that, if history is any guide, we'll see higher
capacity growth and cheaper fares, which are great for travelers but dilute the
benefits for airlines of cheaper fuels," Kaplan wrote in an email.
Wolfe Research analyst Hunter Keay made a similar case in a
Dec. 7 investment note in which he downgraded Wolfe's rating of the airline
sector from "market overweight" to "market underweight."
"Industry capacity, which was already tracking at high
rates into [the first quarter of next year], is tracking incrementally higher
since oil prices fell," Keay wrote. "We feel this growth is not
likely to come down much, given the magnitude of the decline in oil prices and
still reasonably strong demand."