Generally, jet fuel prices account for the majority of total
expenses of the air carriers. The lower the oil price, the better
it is for these companies. But in reality, oil prices act as an
indicator of the general economic conditions. Lower oil prices
indicate a slowing economy and the consequent fall in global air
Global economic uncertainties make matters worse. European
problems are intensifying, and the economy at large already faces
threats of another recession. In such a scenario, even the warning
of a drop in air travel demand would jeopardize airline stocks.
Major U.S. airline shares plunged yesterday on falling oil
Spirit Airlines Inc.
) suffered the most from these negative sentiments as its share
price dropped more than 7%. Stocks of
United Continental Holdings Inc.
Alaska Air Group Inc.
) fell more than 6% and the share price of
Delta Air Lines
) dropped nearly 2%.
Three air carriers -
Southwest Airlines Co.
Alaska Air Group Inc.
JetBlue Airways Corporation
) were least affected. Their share price slid 0.88%, 0.46% and
The drop in demand is expected to hurt airline traffic in the
near term, resulting in lower profits. Given the weak macroeconomic
data points, we believe the carriers are ready to accept the burden
of rising fuel prices as they are well positioned to endure the
current crisis. Passing on the increased cost to customers in the
form of fare hikes and efficient use of fuel-hedging strategies are
helping them to combat the rising fuel prices.
Apart from cutting capacity, air carriers are adding novel
features to their services and introducing new products. These
measures will fuel revenue growth and reduce non-fuel costs,
thereby driving future profitability.
We are currently maintaining our long-term Neutral
recommendation on Delta, United Continental, Southwest and JetBlue.
For the short term (1-3 months), these stocks retain the Zacks #3
ALASKA AIR GRP (ALK): Free Stock Analysis
DELTA AIR LINES (DAL): Free Stock Analysis
JETBLUE AIRWAYS (JBLU): Free Stock Analysis
SOUTHWEST AIR (LUV): Free Stock Analysis Report
SPIRIT AIRLINES (SAVE): Free Stock Analysis
UNITED CONT HLD (UAL): Free Stock Analysis
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