CHICAGO, Aug. 17, 2012 /PRNewswire/ -- Today, Zacks Equity Research discusses the U.S. Airline, including Delta Air Lines Inc. (NYSE:DAL), United Continental Holdings Inc. (NYSE:UAL), US Airways Group Inc. (NYSE:LCC), AMR Corp. (OTC:AAMRQ) and Air France (OTC:AFLYY).
The airline profit outlook depends on fuel prices, the major variable component in the industry.
Crude oil price has dropped about 15% in the recently concluded second quarter. Lower fuel price no doubt cuts airline operating expenses, but it also indicates a slowing economy and the consequent fall in global air travel demand. However, if pricing remains stable despite the questionable macroeconomic outlook, the carriers should experience better profitability solely on the back of falling fuel costs.
Even with the falling fuel prices, the Association projects fuel to account for 33% of the overall operating costs, which is at similar levels when oil prices spiked in 2008 but 13–14% higher than a decade ago.
High crude oil prices, largely a function of geostrategic forces, are beyond the control of the airlines. However, using Brent crude oil as the basis, IATA expects crude oil price will hover around $110 per barrel this year. We expect crude oil and jet fuel prices to increase further this year because of the political tension in the Persian Gulf, but forecasting this key variable with any level of accuracy has always been extremely challenging.
Given the weak macroeconomic data points, we believe the carriers are ready to accept the burden of rising fuel prices as they are well positioned to endure the current crisis. Successfully passing on the increased cost to customers in the form of fare hikes and efficient use of fuel-hedging strategies are helping them to combat the rising fuel prices (hedging strategies discussed below).
) slashed their capacity by about 16.6%, 16.3%, 14.3% and 8.4%, respectively as per the Center for Aviation (CAPA).
Other international airlines like Air Canada, Air France (OTC:AFLYY), Qantas Airways, Korean Airlines and All Nippon Airways also reduced their capacities over the past two years.
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