Oil prices can play spoilsport to airline stocks rally

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2017 was a fantastic year for airline stocks as relatively lower oil prices, higher demand and improved operational performance brightened the outlook for the sector. However, after a solid performance last year, the global airline industry is bracing for an oil shock in 2018. The recent run-up in oil prices, if sustained, may exert a significant drag on airlines profitability in this year.

Stock returns
[Image 1: Watchlist highlights stock returns for leading airlines as on Jan. 24, 2018
(*For US-based companies, returns as on Jan. 23, 2018)]

In 2017, jet fuel prices averaged at USD 1.5 per gallon for the first 3-quarters. A spike in crude oil moved jet fuel average price to USD 1.74 per gallon in Q4’17 from USD 1.59 per gallon in Q3’17. The impact of 9.4% sequential rise in jet fuel prices in Q4 was clearly visible in recently announced quarterly numbers of leading airlines.

For instance, Delta Air Lines witnessed an 8% y-o-y drop in net income in Q4’17 owning to 21% rise in fuel cost. At the same time, CASM (cost per available seat mile) – Fuel for Delta rose significantly by 38.67% sequentially to USD 0.03 in Q4’17.

Delta - CASM Fuel
[Image 2: Compare screen highlights trend for Delta Air Lines’ CASM – Fuel and Jet Fuel]

Jet fuel prices are expected to remain elevated in the near-term based on our analysis of news flow on crude oil. Heckyl’s Positive to Negative News Ratio showed strong bullish sentiment for crude oil prices.

Our back-testing has indicated a strong positive correlation (0.91), implying that the Heckyl Positive to Negative News Ratio is an alternative proxy for crude oil prices. Heckyl Positive to Negative News Ratio issues bullish/bearish signals based on the crossover of shorter-term (90-days) and longer-term (180-days) moving averages of the daily values of the ratio.

Oil Positive to Negative News Ratio
[Image 3: Crude oil WTI futures v/s Heckyl Positive to Negative News Ratio]

Bullish signal: When the shorter term (90 days) moving average of Positive to Negative News Ratio is higher than the longer term moving average (180-days), the crude oil tends to rise. 

Bearish signal: When the shorter term (90 days) moving average is lower than the longer-term moving average (180-days), crude oil tends to fall.

In our view, strong bullish sentiment for crude oil prices does not augur well for airline stocks as higher jet fuel prices may hurt the profitability of the sector.

Heckyl’s alternative data platform FiND collects and organizes structured and unstructured data to provide unique insights into airlines’ operating and financial performance. Insights derived from Heckyl platform can help to detect hidden trends and patterns for the companies and the airline industry at large.

To know more about FiND, email us at find@heckyl.com

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