As most U.S. airlines prepare to report their third-quarter earnings this week, investors have to weigh the downward pull of Ebola worries vs. the upward push of cheaper oil.
Wall Street analysts know well the impact of the falling price of crude oil and the jet fuel made from it. What has been hard to determine is the impact of Ebola on bookings, fares and earnings.
“We believe airlines have been too harshly penalized by sensitivity to the arrival of Ebola in the U.S. and international economic concerns, especially when considering the meaningful earnings ‘cushion’ provided by declines in jet fuel prices,” analyst Bob McAdoo of Imperial Capital wrote in a Wednesday research note.
“Although we hesitate to pound the table on any of the major airlines as earning season gets underway given headline sensitivity risk, we remain bullish on the industry,” he added.
The revelation that a nurse diagnosed Tuesday with Ebola had flown on a Frontier Airlines flight from Cleveland to Dallas on Monday did nothing to still the concerns. Stock prices for publicly traded airlines took a dive Wednesday as news spread.
But by the end of the day Wednesday, most of the big losses had disappeared. And by Friday’s close, the four largest airlines — American Airlines Group Inc., United Continental Holdings Inc., Delta Air Lines Inc. and Southwest Airlines Co. — all saw their shares close at a higher price than the previous Friday.
Helping ease those fears were reassurances Thursday from top executives at Delta, which reported its third-quarter results that day and said they had seen no effect on bookings from Ebola fears.
“We monitor it on a daily basis,” said Glen W. Hauenstein, Delta’s executive vice president of network planning and revenue management, “and we have not seen any changes in the booking trends.”
What analysts and airline executives do know is that a drop in fuel prices can have a very big impact on an airline’s bottom line.
The Big Four as a group used nearly 13.8 billion gallons of jet fuel in 2013, and every one-cent change in the price of jet fuel meant nearly $138 million in operating expenses, up or down.
Consider that the spot price for U.S. Gulf Coast jet fuel averaged $2.49 a gallon for a week ended last Tuesday. During the comparable five days in 2013, the average was $2.92 a gallon.
If those airlines could actually enjoy a 43-cent reduction in jet fuel prices, their fuel spending would drop nearly $6 billion.
However, spot prices and the actual price paid can vary greatly, particularly with most airlines other than American using hedges to protect themselves against upward spikes in fuel prices.
Even so, the benefit in the third quarter and beyond could be substantial.
“Historically, investors have not given much credit for lower fuel prices given their ephemeral nature and the fact that investors did not directly benefit from the short-term gains,” Deutsche Bank analyst Michael Linenberg wrote in an Oct. 9 report.
“With every major airline either buying back stock and/or paying down debt and/or paying a dividend, we believe that investors should ascribe more utility to lower fuel prices as we believe some of the savings will find their way into their ‘pockets,’” Linenberg wrote.
With most carriers to report earnings this week, analysts have been fine-tuning their estimates. Here are the latest projections:
Fort Worth-based American Airlines Group, parent of American Airlines Inc. and US Airways Inc., is expected to earn $1.64 a share, or about $1.2 billion, excluding any special gains or losses.
Dallas-based Southwest Airlines is expected to report net income of 53 cents a share, or about $370 million.
United Continental, parent of United Airlines Inc., is projected to earn $2.68 a share, or about $1.05 billion.
Those numbers would compare to Delta’s earnings of $1.0 billion excluding items, or $357 million excluding a long list of special items.
But analysts will be listening more to how airlines see the future rather than how they did in the past.
“Despite the recent sell-off in airline shares due, in part, to Ebola concerns, 4Q14 and FY15 earnings estimates are likely to be raised, not lowered, in our view, as the positive impact of plummeting jet fuel prices begins to be factored into earnings,” analyst Michael Derchin of CRT Capital wrote in a Wednesday note.
But analyst Helane Becker said there are still things to worry about.
“The airlines have been operating in an environment of high jet fuel costs, which has forced them to maintain capacity discipline and raise fares,” she wrote in a Thursday note. “With jet fuel declining dramatically, will the group give up their margin in discounted fares and will money-losing capacity remain in the system? We hope not.”
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