Falling oil prices have sent gas and jet fuel prices to record lows. As of December 2nd, oil prices are below $70 a barrel thanks to fracking, a controversial American practice of extracting oil; OPEC’s decision to maintain current oil production instead of decreasing output quotas; and a slow in demand. As a result, commuters have been enjoying lower gas prices; companies are seeing lower shipping costs; and airlines are reaping the benefits of increased profit. Even though the cost of jet fuel has dropped, airlines are not lowering fares. With an increase in flying fares and a decrease in the cost of jet fuel, many are expecting big profits for airlines.
Delta Air Lines Inc (NYSE:DAL)
Blogger Jonas Elmerraji of The Street rated Delta a Buy on December 1st, citing the “free-fall in oil prices.” Elmerraji explained that the cost of fuel is the largest expense for airlines, so the drop in prices provides “far more padding to Delta’s bottom line than any amount of hedging could.” Elmerraji also notes that Delta is a safe buy thanks to their 2012 purchase of an oil refinery near Philadelphia “as an ongoing hedge against oil prices.” Delta saw the refinery purchase as an investment intended to shield Delta from exorbitant fuel prices. Delta closed at $46.67 on December 1st compared to its 1-year high of $47.19.
Elmerraji has a 63% overall success rate recommending stocks with an average return of +4.3% per recommendation.
American Airlines Group (NASDAQ:AAL)
On December 1st, blogger Eric Dutram of Zacks was bullish on American Airlines. Dutram attributes some of his reasoning to the significant drop in crude oil prices. He also explains that American Airlines is prominent in the airline industry yet there is room for more growth, noting “even with an 80% surge YTD, there is plenty of reason to hope for more gains heading into 2015 too.” Dutram is not intimidated by the lofty estimates for American Airlines because “AAL has beaten estimates every time, including a 179% beat four quarters ago.” Dutram concludes that American Airlines is “well-positioned for more appreciation, and it is hard to deny the current industry trends which suggest that more growth is definitely ahead.” American Airlines closed at $48.53 on December 1st compared to its 1-year high of $49.47.
Dutram has a 55% overall success rating with an average return of +3.8% per recommendation.
JetBlue (NASDAQ:JBLU)
Analyst Glenn Engel of Bank of America/Merrill Lynch upgraded JetBlue to a Buy from underperform with a $17 price target on December 1st in response to the falling oil prices. Engel also noted that falling oil prices will benefit JetBlue more than American Airlines due to the profit sharing agreement that American Airlines has with employees. JetBlue closed at $14.63 on December 1st compared to its 1-year high of $15.29.
Engel has a 44% overall success rate recommending stocks with an average return of +10.5% per recommendation.
Conclusion
Oil is a particularly delicate market as it is easily affected by unpredictable events, such as natural disasters and regional violence. Oil costs may be hitting record lows and profiting airlines, but how long will this trend last?