Airlines continue to order new fuel-efficient aircraft that can see them through this decade as soaring oil prices have sent airline stocks into a tailspin across the globe in recent weeks. Oil will go up further to $115 in 2011 for sure and as mentioned here and everywhere else many times, if more Middle Eastern governments fall then all bets are off.
BUT…The cost of fuel may actually be presenting an opportunity for airlines and investors alike.
The rising turmoil in Libya has pushed the price of crude to settle up by more than US$10 on the New York Mercantile Exchange since February 18 to US$96.86 a barrel yesterday. Over the same period, airline stocks have fallen by an average of 6% globally with investors that remain after profit taking in December 2010 taking flight.
The rationale behind the sell-off seems sound since fuel accounts for up to 30% of the average carrier’s costs. But the world has turned since 2008 and the current market with its consolidated leaner airlines with lower capacity on just about all routes should mean that higher fuel prices will not dent the earnings of airlines nearly as much as investors currently fear. The airlines are off setting the fuel increases in all areas other than India with solid additions to the already increased air fares. The market in the USA and South East Asia both look to be strong at this time.
In addition, in North America the higher fuel prices provide a perfect foil for carriers to continue to test the upper threshold of where higher fares begin to diminish demand.
To off set fuel expenses airlines will have to increase fares across the board by about 75 cents to each $1 increase in oil, which at the moment means we are in $7.5 fare increase across the board on all flights per month territory. Investors should match this knowledge for February against what each airline has done. You will find that most are running above this mark and have the ability to offset higher fuel prices in this market. This means that going in now for a twelve month slog on airline stocks should see you coming out of the Middle East/North Africa political mess with good value.
In this world where we have no clue when demand will be destroyed by some sort of economic/political event and with China driving the world to recovery on the back of high inflation and social unrest, there comes a point where you just have to take multiple options – This mentioned today is one of them.