How Record-Low Oil Prices Benefit The Airline Industry

Oil prices have been falling since the summer, having widespread effects on everything from gas prices to geo-political tensions across Europe and the Middle East.

A barrel of oil is now less than $60, while it was topping $100 just months ago in July.

Airlines have been reaping the benefits of dropping oil prices, as jet fuel is by far the largest airline expense. The International Air Transport Association estimates that airlines will collectively profit nearly $20 billion for 2014 and $25 billion in 2015.

In light of this news, analyst Michael Linenberg of Deutsche Bank released a report on December 15 rating nine airline companies. Linenberg noted, “Thus far in 2014, US airline stocks are the best performing sector among the 98 Dow Jones US total market industry groups.”

Linenberg noted that some of his favorite stocks include United Continental Holdings Inc UAL Southwest Airlines Co LUV and Delta Air Lines, Inc. DAL. Linenberg has a 63 percent overall success rate recommending stocks with an average return of +29 percent per recommendation.

A Bit More Detail

Linenberg reiterated a Buy rating for United Continental and raised his price target from $50 to $80. He noted, “United is in the process of implementing a cost savings program and network restructuring which should lead to a narrowing of the profitability gap between the carrier and its legacy peers.”

Linenberg has rated United Continental five times since October 2012, earning him a 60 percent success rate, recommending the stock with a +24.7 percent average return per United Continental recommendation.

Additionally, Linenberg reiterated a Buy rating for Southwest and increased his price target from $46 to $55. The analyst noted, “Southwest should continue to benefit from its technology investments which allow for better revenue management.”

Linenberg has rated the airline company seven times since October 2012, earning him an 83 percent success rate recommending Southwest with a +67.3 percent average return per recommendation.

Linenberg also reiterated a Buy rating for Delta but did not provide a price target. He noted, “Delta led the charge among its US peers several years ago when it announced what at the time seemed like a heroic plan to reduce its net debt from $17 billion at year end 2009 to $10 billion by year end 2012… The company expects to end 2014 with $7.2 billion in net debt.

"Going forward, its investments in other airlines, the continuation of its domestic re-fleeting, and its new fare structure should continue to drive profitability higher.”

Linenberg has rated Delta Airlines 11 times since July 2013, earning a 91 percent success rate recommending the stock with an average return of +53.7 percent per Delta recommendation.

However, amongst all the Buy ratings, Linenberg reiterated a Sell rating on Alaska Air Group, Inc. ALK with a price target of $53, up from $42.50. The analyst has rated Alaska Air eight times since June 2012. However, he only has a 33 percent success rate recommending the stock with a negative average return of -12 percent per recommendation.

Overall, Linenberg seems very optimistic about his airline projections. He increased 2015 estimates, raising his airline net profit forecast from $12.4 billion to $16.5 billion thanks to “lower fuel price, lower interest expense and modest non-fuel cost increases.” Linenberg added, “We see 2015 shaping up to be an even stronger year and believe that airlines will continue to share their growing wealth with their stakeholders.”