November US airline stocks rise, volume and capacity growth slow (Part 10 of 12)
Falling crude oil prices
The cost of fuel is the largest cost component of airline companies. Because jet fuel is produced by refining crude oil, jet fuel prices follow the trend in crude oil price. According to the US Energy Information Administration (or EIA), Brent crude oil spot prices fell to $75.79 per barrel in November, a year-over-year decline of 26%. This is the lowest monthly average since September 2010.
Crude oil fell continuously for the fifth consecutive month since July 2014. Recent news reports indicate that it dipped down even further, settling below $51.
The falling crude oil prices in 2014 reduced the fuel cost burden on airline companies. According to the estimates, the benefits of lower crude oil prices will continue into 2015. The estimated price for FY14 was revised downward to $99.54 from $101.04 last month. Brent crude oil prices are expected to fall by ~8.4% in 2014 and by ~32% to $68.08 in 2015.
Growth in crude production
Excess supply led to a decrease in prices. September crude oil production was 8.7 million bbl per day (or bbl/d), the highest since July 1986. It increased to 8.9 million bbl/d in October and 9 million bbl/d in November. Production is estimated to increase further to 9.3 million bbl/d in 2015. This will be the highest level of production since 1972.
Transportation ETFs such as the iShares Transportation Average ETF (IYT) and the SPDR S&P Transportation ETF (XTN) will benefit from lower fuel oil prices, as declining costs of transportation companies will increase their profit margins.
In 3Q14, the fuel price per gallon of all major US airlines fell. Delta’s (DAL) fuel price per gallon declined by 2.4% year-over-year (Y-O-Y) to $2.90. American’s (AAL) decreased by 2% to $2.97, Southwest’s (LUV) declined by 2.3% to $2.99, United’s declined by 3.2% to $3.02, and JetBlue’s (JBLU) declined by 2.9% to $3.05. Alaska had the highest cost per gallon of $3.15 in 3Q14, a Y-O-Y decrease of 2.8%.
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