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Decline in Oil Prices Spur Buyback Activity in Airline Space

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It is no secret that falling oil prices have been a godsend for stocks in the airline space. This is because fuel costs account for a major chunk of an airline's operating expenses.

Despite the recent rally, crude prices have been hovering around the $40 a barrel mark. This represents a significant decline from the approximate $105 per barrel witnessed in July last year. The reduction in oil prices has brought down operating expenses significantly for carriers, thereby aiding their bottom lines.

Lower jet fuel prices have been a boon for the airline industry given the inversely proportional relation between crude prices and the value of aviation stocks. According to data released by the Bureau of Transportation Statistics, jet fuel costs plummeted 37.8% on a year-over-year basis to $1.83 per gallon in July 2015.

Low Fuel Costs = Massive Savings

Weak oil prices have resulted in tremendous savings for carriers. The persistent drop in oil prices has significantly boosted the bottom line of airline stocks in the past quarters. Major companies like Delta Air Lines (DAL - Free Report) , American Airlines Group (AAL - Free Report) , United Continental Holdings, Inc. (UAL - Free Report) , Alaska Air Group (ALK - Free Report) and Virgin America posted better-than-expected earnings in the second quarter of 2015, backed by low fuel costs.

American Airlines Group, which does not hedge fuel costs, expects to generate savings to the tune of $4.8 billion in 2015 due to soft oil prices. Delta, which has restructured its fuel hedge portfolio in the wake of the soft fuel price environment, expects to generate savings over $2 billion in 2015. Delta stated on its second quarter 2015 conference call that it expects fuel costs per gallon in the band of $1.90 to $2.00 through the rest of the year. The projection is well below the $2.65 per gallon spent in the first half of 2015.

Other carriers like United Continental and Southwest Airlines (LUV - Free Report) are also on track to generate huge savings in 2015 due to the massive reduction in oil prices.

Fuel Savings = Shareholders’ Gain

The massive savings have certainly cushioned the financial health of carriers. This has prompted the companies to launch share buyback programs, make increased dividend payments and significantly reduce their debt levels.

With dividend hikes and authorization of new buyback programs characterizing the airline space of late, it can be said that shareholders are also reaping the benefits of weak oil prices.

Surge in Buybacks

In May this year, the board of directors at Delta approved a new share repurchase program worth $5 billion. Simultaneously, the airline behemoth increased its quarterly dividend by 50% to 13.50 cents per share (54 cents per share annualized). The new repurchase plan, which will replace the existing $2 billion share buyback, runs through 2017. Delta expects to return in excess of $6 billion to its shareholders through 2017.

Southwest Airlines is also treading the same path. Also in May, Dallas-based low-cost carrier Southwest Airlines’ board declared the approval of a new stock repurchase program worth $1.5 billion. Simultaneously, the carrier hiked its quarterly dividend by 25% to 7.5 cents per share (30 cents per share annualized).

Not to be left behind, American Airlines, in July, announced that its board of directors has cleared a fresh buyback program worth $2 billion. This is in addition to the one announced in Jan 2015. Also, in July, United Continental announced a new share repurchase program worth $3 billion, which will run through 2017.

To Conclude

With oil prices expected to remain weak through the remainder of 2015, carriers should continue to generate massive savings. This should see a further uptick in shareholder friendly activities including share buybacks. Consequently, augmenting your portfolio with airline stocks sporting solid financial health is not a bad idea.

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