The airline industry has had a nearly smooth ride for the most part of 2019, despite Boeing 737 MAX woes. However, there might be a reversal of the scenario soon. Amid unit revenue guidance cut by U.S. airlines due to numerous flight cancellations as a result of Hurricane Dorian, the industry now faces a new headwind.
Oil prices jumped 15% yesterday (the biggest one-day gain since December 2008), following drone attacks on crude oil facilities in Saudi Arabia over the weekend, which knocked out about a half of the kingdom’s daily crude production. Both the United States and Saudi Arabia are taking substantial measures to counter the crisis. Meanwhile, market watchers believe that it will take a while before majority of the oil output is restored to its normal levels.
Following this large-scale oil supply disruption, speculations are rife about a likely surge in fuel costs as the shortage persists. With fuel expenses comprising the major chunk of airline expenditures, the news made investors jittery. Consequently, major U.S. airline stocks saw shares going downhill yesterday. American Airlines Group (AAL - Free Report) , Delta Air Lines (DAL - Free Report) , United Airlines Holdings (UAL - Free Report) , JetBlue Airways Corporation (JBLU - Free Report) and Alaska Air Group (ALK - Free Report) shares declined 7.3%, 1.6%, 2.8%, 3.1% and 1.8% respectively at the close of business on Sep 16. The NYSE Arca Airline Index also slid 2.9% at the close of yesterday’s trading session.
Will American Airlines be Affected the Most?
In the event of a surge in fuel prices, American Airlines is likely to feel the maximum pressure as it is the “largest consumer of jet fuel in the world”, according to Cowen.
The carrier, which has 24 Boeing 737 MAX jets in its fleet, is already struggling with numerous flight cancellations each day due to the prolonged grounding of Boeing 737 MAX aircraft. As a result, the company expects its current-year pre-tax earnings to be affected to the tune of roughly $400 million. Further unit costs (excluding fuel and special items) are increasing due to reduced capacity owing to the groundings. For 2019, the airline expects unit costs (excluding fuel and special items) to increase in the 3.5-4.5% range.
Unit Revenue View Cuts Due to Hurricane Dorian
Hurricane Dorian caused numerous flight cancellations forcing JetBlue and Spirit Airlines (SAVE - Free Report) to provide bearish forecasts for the third quarter of 2019. JetBlue now anticipates revenue per available seat mile to either decline up to 2% or remain flat year over year. Meanwhile, Spirit now anticipates total revenue per available seat mile to decline 2.5-3.5% year over year.
Given this drab scenario, the fuel price hike will only make matters worse for these carriers.
While the spike in oil prices is likely to have a mild impact on the airline companies’ third-quarter results, the effect will be “more material” to fourth-quarter results and thereafter, according to a Cowen analyst.
Stocks in the industry are likely to be hit hard in the event of the airline companies’ inability to shift the rise in fuel costs to consumers through increased ticket prices or through other measures such as baggage fee hikes.
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