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Airlines See a Sharp Decline in Monday's Trading: Here's Why
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As fuel expenses represent a major component of the airlines’ operating expenses, the northward movement of oil price is a headwind to their bottom-line growth.
The commodity price has been flaring up for quite some time, mainly due to low global oil inventories. As a result, many airline stocks had forecast higher fuel cost per gallon for first-quarter 2022. However, the war between Russia and Ukraine following the invasion of the latter by the former on Feb 24, pushed up the commodity price to more than $100 per barrel, for the first time in seven years.
Oil price went through the roof yesterday, touching $119.40 a barrel, the highest level since 2008. Naturally, airline stocks were hit hard as oil price is inversely proportional to the bottom-line health of airlines. Consequently, the NYSE ARCA Airline Index plummeted 13.3% on Mar 7 with stocks like Delta Air Lines (DAL - Free Report) , United Airlines (UAL - Free Report) , Hawaiian Holdings (HA - Free Report) and Spirit Airlines (SAVE - Free Report) decreasing 12.78%, 15%, 11.3% and 16.71%, respectively, on Mar 7 from the Mar 4 closing. The huge oil price uptick on Mar 7 followed updates that United States and European allies were considering options to ban import of oil from Russia, one of the world's largest producers of the commodity.
The sharp increase in oil price since the invasion by Russia resulted in U.S. airline stocks shedding nearly 20% of their value, on average. This dramatic surge in one of the key input costs is likely to present airlines with a fresh challenge, which were otherwise limping back to normalcy on the back of improved air-travel demand (albeit mainly for leisure) from the pandemic lows. The improved air-travel demand scenario can be gauged by the fourth-quarter results of the key U.S. airline stocks.
In the December quarter, Delta’s revenues came in at $9,470 million, which not only beat the Zacks Consensus Estimate of $9,232.1 million but also soared in excess of 100% from the year-ago quarter’s figure as people resorted to air travel during the holidays.
The upturn in air-travel demand in the United States can be gauged from the fact that 82.2% of the fourth-quarter 2021 passenger revenues at Delta, currently carrying a Zacks Rank #3 (Hold), came from the domestic markets. At the time of releasing its fourth-quarter results, DAL’s management expected first-quarter 2022 fuel price per gallon in the $2.35-$2.50 range. However, the current scenario of oil price explosion is likely to imply that the fuel price per gallon will be even higher, thereby hurting first-quarter 2022 results even if passenger revenues are buoyant.
Similarly, United Airlines’ fourth-quarter 2021 revenues surged more than 100% year over year. Passenger revenues, accounting for 84% of the top line, soared 185.4% to $6,878 million. Moreover, UAL’s current first-quarter 2022 expectation of fuel price per gallon being $2.51 per gallon is likely to be surpassed with oil price skyrocketing.
What the Future May Hold for Airlines?
U.S. airlines expect air-traffic to remain strong and be substantial in the summer and spring seasons as coronavirus cases recede. Their route expansion plans bear testimony to this. Evidently, Spirit Airlines intends to launch nonstop seasonal flights connecting the Milwaukee Mitchell International Airport and the Myrtle Beach, SC, this summer.
The flights will operate from May 27. Initially, they will be operational on Fridays and Mondays. However, from Jun 17, the service that will run through the Labor Day weekend will be available on Mondays, Wednesdays and Fridays. Myrtle Beach is SAVE’s ninth non-stop destination from Milwaukee.
Likewise, Hawaiian Holdings’ subsidiary Hawaiian Airlines aims to resume nonstop service between Oakland and Kona on the Island of Hawaii after 2016. The airline’s Oakland-Kona service will begin on Jun 15 and operate through Sep 6.
The seasonal flight, aimed at meeting the anticipated demand swell, will be the fourth daily flight to be operated by Hawaiian Airlines, connecting Oakland and Hawaii. To fulfill the same objective, Hawaiian Airlines will add a second daily flight connecting San Francisco with Honolulu.
However, with fuel costs shooting up substantially following the northward journey of oil price, airlines are likely to raise air fares to compensate for the fuel cost-led operating expense upsurge. Consequently, summer travel is unlikely to be pocket-friendly. However, only time will tell if the likely rise in ticket price has an adverse impact on the traffic.
Watch this space for further updates on how airlines actually combat this steep spike in fuel costs.
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Airlines See a Sharp Decline in Monday's Trading: Here's Why
As fuel expenses represent a major component of the airlines’ operating expenses, the northward movement of oil price is a headwind to their bottom-line growth.
The commodity price has been flaring up for quite some time, mainly due to low global oil inventories. As a result, many airline stocks had forecast higher fuel cost per gallon for first-quarter 2022. However, the war between Russia and Ukraine following the invasion of the latter by the former on Feb 24, pushed up the commodity price to more than $100 per barrel, for the first time in seven years.
Oil price went through the roof yesterday, touching $119.40 a barrel, the highest level since 2008. Naturally, airline stocks were hit hard as oil price is inversely proportional to the bottom-line health of airlines. Consequently, the NYSE ARCA Airline Index plummeted 13.3% on Mar 7 with stocks like Delta Air Lines (DAL - Free Report) , United Airlines (UAL - Free Report) , Hawaiian Holdings (HA - Free Report) and Spirit Airlines (SAVE - Free Report) decreasing 12.78%, 15%, 11.3% and 16.71%, respectively, on Mar 7 from the Mar 4 closing. The huge oil price uptick on Mar 7 followed updates that United States and European allies were considering options to ban import of oil from Russia, one of the world's largest producers of the commodity.
The sharp increase in oil price since the invasion by Russia resulted in U.S. airline stocks shedding nearly 20% of their value, on average. This dramatic surge in one of the key input costs is likely to present airlines with a fresh challenge, which were otherwise limping back to normalcy on the back of improved air-travel demand (albeit mainly for leisure) from the pandemic lows. The improved air-travel demand scenario can be gauged by the fourth-quarter results of the key U.S. airline stocks.
In the December quarter, Delta’s revenues came in at $9,470 million, which not only beat the Zacks Consensus Estimate of $9,232.1 million but also soared in excess of 100% from the year-ago quarter’s figure as people resorted to air travel during the holidays.
The upturn in air-travel demand in the United States can be gauged from the fact that 82.2% of the fourth-quarter 2021 passenger revenues at Delta, currently carrying a Zacks Rank #3 (Hold), came from the domestic markets. At the time of releasing its fourth-quarter results, DAL’s management expected first-quarter 2022 fuel price per gallon in the $2.35-$2.50 range. However, the current scenario of oil price explosion is likely to imply that the fuel price per gallon will be even higher, thereby hurting first-quarter 2022 results even if passenger revenues are buoyant.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Similarly, United Airlines’ fourth-quarter 2021 revenues surged more than 100% year over year. Passenger revenues, accounting for 84% of the top line, soared 185.4% to $6,878 million. Moreover, UAL’s current first-quarter 2022 expectation of fuel price per gallon being $2.51 per gallon is likely to be surpassed with oil price skyrocketing.
What the Future May Hold for Airlines?
U.S. airlines expect air-traffic to remain strong and be substantial in the summer and spring seasons as coronavirus cases recede. Their route expansion plans bear testimony to this. Evidently, Spirit Airlines intends to launch nonstop seasonal flights connecting the Milwaukee Mitchell International Airport and the Myrtle Beach, SC, this summer.
The flights will operate from May 27. Initially, they will be operational on Fridays and Mondays. However, from Jun 17, the service that will run through the Labor Day weekend will be available on Mondays, Wednesdays and Fridays. Myrtle Beach is SAVE’s ninth non-stop destination from Milwaukee.
Likewise, Hawaiian Holdings’ subsidiary Hawaiian Airlines aims to resume nonstop service between Oakland and Kona on the Island of Hawaii after 2016. The airline’s Oakland-Kona service will begin on Jun 15 and operate through Sep 6.
The seasonal flight, aimed at meeting the anticipated demand swell, will be the fourth daily flight to be operated by Hawaiian Airlines, connecting Oakland and Hawaii. To fulfill the same objective, Hawaiian Airlines will add a second daily flight connecting San Francisco with Honolulu.
However, with fuel costs shooting up substantially following the northward journey of oil price, airlines are likely to raise air fares to compensate for the fuel cost-led operating expense upsurge. Consequently, summer travel is unlikely to be pocket-friendly. However, only time will tell if the likely rise in ticket price has an adverse impact on the traffic.
Watch this space for further updates on how airlines actually combat this steep spike in fuel costs.