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May Air Fares Rise Despite Weak Oil Prices: What Lies Ahead?

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Although fuel costs have are at a low level, air fares in the United States increased in May according to data released by the Bureau of Labor Statistics. Per the report, ticket prices decreased 2% on a month-on-month basis. The increase marked a reversal as ticket prices in March and April got cheaper as the industry grappled with Boeing 737 Max-related concerns.

Moreover, in May, average air fares (unadjusted) inched up 0.9% from the comparable figure a year ago. Even though increase in air fares mean good news for airline companies, it is not so for passengers.

Weak Oil Price & Boeing 737 MAX Scenario

Oil prices had decreased 16.3% in May, which was the most in a month since Nov 2018 when the commodity shed 22% of its value. The sharp decline in oil prices brought good news for airlines as expenses on fuel represent a major input cost for any airline company. Naturally, fall in oil prices imply huge savings for companies in the space. The rise in ticket prices in this scenario is a further boost for airline companies.

Moreover, with the grounding of the Boeing 737 MAX jets, U.S. airline operators, with such jets in their fleet, have been forced to cancel multiple flights. This has dealt a blow to them with the peak summer travel season on. In this scenario, the rise in air fares should enable airline operators to combat the revenue losses from this issue.

In fact, updates on Boeing 737 MAX jets have been flooding the aviation space ever since the deadly Ethiopian Airlines’ crash on Mar 10, 2019. In fact, this was the second accident involving Boeing 737 MAX jets within a span of five months as the same model went down in Indonesia last October, killing 189 people. The latest update came from Southwest Airlines (LUV - Free Report) , which has the largest exposure to Boeing 737 MAX jets among U.S. carriers with 34 such jets in its fleet. Southwest Airlines has suspended operations of its Boeing 737 Max jets until Sep 2, extending the grounding period by almost a month. 

Southwest Airlines carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A few days ago, American Airlines (AAL - Free Report) , which has 24 such jets in its fleet, extended the grounding period to Sep 3 from Aug 19. Previously, American Airlines expected its current-year, pre-tax earnings to be affected to the tune of roughly $350 million. However, the loss might increase with the recent extension in Boeing 737 MAX jet’s grounding time period. In the same vein, United Continental Holdings’ (UAL - Free Report) subsidiary United Airlines, which has 14 such jets in its fleet, suspended the 737 MAX flights from its schedule through Aug 3.

Air Travel to Get More Expensive?

According to media reports, American Airlines recently raised domestic fares $5 each way. Other carriers like Southwest Airlines and Hawaiian Holdings’ (HA - Free Report) subsidiary, Hawaiian Airlines reportedly increased prices of domestic tickets.

Moreover, demand for air travel is strong as can be envisioned from the stellar performances of most carriers in the Memorial Day weekend last month. For example, Delta Air Lines (DAL - Free Report) was responsible for flying more than 2.1 million passengers without a single mainline cancellation in the May 24-27 period. In fact, a record 666,769 passengers were transported on May 24. With demand for air travel expected to remain strong on the back of a strong U.S. economy, we expect further increases in ticket prices.  Moreover, with President Donald Trump recently suspending his plans of a 5% tariff on Mexican goods “indefinitely,” and oil prices expected to recover from current levels, ticket prices might see further increase. Whatever the actual outcome, we anticipate investor focus to remain on the movement of air ticket prices.

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