Despite the low profit margins, little revenue growth and near-perfect competition in the airline industry, shares of major airline companies have spiked in the past several months. Will the recent rally persist? Is it time to dip our toes into the airline industry and consider it a lucrative investment?
Since the beginning of the year, shares of Delta Air Lines, Inc. (NYSE:DAL) spiked by nearly 60%. Delta Air Lines, Inc. (NYSE:DAL)’s stock wasn’t the only the company that rallied in recent months. Shares of United Continental Holdings Inc (NYSE:UAL) sharply rose by 47%; shares of Southwest Airlines Co. (NYSE:LUV), by 40%.
Economic recovery in the U.S isn’t the only factor that could explain the sharp rise of the leading airline stocks. Let’s examine other factors that could have helped pull up these stocks. More importantly, will this rally last?
Jet fuel and the airlines
The drop in the price of oil may have improved the profitability of leading airline companies: In 2013 (year to date), the price of oil reached an average of $93.90 compared with $102.50 during the same time frame in 2012 – an 8.5% decline.
Moreover, the premium of jet fuel over the price of oil also fell in the past several months, as indicated in the chart below. According to the Energy Information Administration, for a typical airline jet fuel accounts for nearly 30% of its total expenditure. So the drop in oil price and premium of jet fuel may have contributed to a drop in ticket prices and a rise in airline profit margins, even though they remain razor thin.
Source of Data: EIA
The drop in oil prices is reflected in the decline in fuel expenses and average price per gallon. For Delta (opens pdf), the price per gallon fell by 1.2% in the first quarter of 2013 (y-o-y); total fuel expenses fell by 2.7% in Q1 2013 compared to Q1 2012.
Airline travel and freight on the rise
According to the Bureau of Transportation, air travel and freight transportation services increased in the first quarter of 2013 by 0.9% compared to 2012 (y-o-y): the travel business grew by only 0.1%; freight transportation rose by 1.3%.
Leading airline companies have shown a very similar growth rate in terms of revenue: Delta Air Lines, Inc. (NYSE:DAL)’s revenue grew by roughly 1% in the first quarter of 2013 (y-o-y) compared to the same quarter in 2012; Southwest’s revenue rose by 1.4% in the first quarter of 2013; United Continental Holdings Inc (NYSE:UAL)’s net income increased by 2.3% (y-o-y). These leading companies were able to augment their revenue in recent months as they cut their capacity: Delta Air Lines, Inc. (NYSE:DAL)’s capacity was down by 2.5% in Q1 2013 (y-o-y). United Continental also cut its capacity by 4.9% in Q1 2013 compared to the same time last year.