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In “Get Ready for $150 Oil,” Barron’s predicts an oil shock will occur in spring 2012, with the black commodity reaching a record average monthly price of $150 per barrel, with spikes to $165 and $170 along the way. If this prognostication proves correct, airlines are in for a world of hurt. Before we get started on just how painful this shock could be, we invite airline stock speculators to take a read of our industry primer on the airline industry.
Jet fuel prices generally represent the largest component of an airline’s cost structure, and we estimate that for every $1 increase in the price of crude oil, it costs the global airline industry about $1.5 to $1.7 billion more. And while airlines have been layering on additional fees (checked baggage, etc.), we still believe that even with such measures (coupled with some fare hikes from the low-cost group under this scenario), airlines would at best recoup about 75% to 85% of the higher cost of jet fuel. That means, for every $1 sustainable increase in the price of black gold, we can probably expect the global airline industry to lose an additional $240 million to $400 million. Click here to read our views on the 2012 hedge positions of the major network carriers.
The IATA estimates that airlines would earn about $4 billion under a scenario where the average price of crude oil is $110 per barrel. By extension, and based on our analysis, if crude oil rose to a sustainable price of $150 per barrel in 2012, the global airline industry could lose as much as $12 billion next year, and that assumes demand is not choked off due to the residual impact of lower consumer discretionary spending caused by a higher gas bill to fill up the tank–let alone the negative impact higher ticket prices would have on passenger demand (should airlines be able to re-capture 75% to 85% of their higher fuel costs).
In our analysis of the fleet ages of the major carriers, we outline which airlines [out of US Airways (LCC), United Continental (UAL), AMR Corp. (AMR), and Delta (DAL)] are flying the most fuel-inefficient planes (and therefore would be most impacted by this predicted rise). That said, however, a sustainable increase to $150 per barrel will likely spare no airline, and send the group back toward their 52-week lows, in our opinion. At this time, we are currently evaluating long-term put options on the Guggenheum Airline ETF (FAA) as an addition to our Best Ideas List.