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The oil industry’s pain is airlines gain, especially for those that don’t have a fully hedged fuel book over the next six months or so such as JetBlue (NASDAQ: JBLU, initial buy at $8.77). With oil prices in the doldrums, airlines should continue posting super profits for some time yet.
In the third quarter ended September 30, JetBlue had hedges in place for just 14% of its expected fuel needs. That resulted in a realized fuel price of $1.85 per gallon, a decrease of more than a third (-39%) versus the third quarter 2014 realized fuel price of $3.05. The company recorded losses upon settlement of effective hedges of $27 million during 3Q15, but its aircraft fuel and related taxes expense of $342 million was $173 million, or 34% lower than in the year earlier quarter.
For the current quarter a similar scenario should play out, with JetBlue having hedging in place for approximately 15% of its projected fuel requirements using a combination of jet fuel swaps and collars. Based on the fuel price curve (using futures) in mid October, JetBlue was anticipating an average price per gallon, including the impact of hedges and fuel taxes, of $1.77 in the fourth quarter.
With pressure on the fuel price curve since, we expect to see some further modest benefit versus the earlier projection. And at the time JetBlue reported its third quarter results in late October, the airline had no fuel hedges in place for 2016, setting itself up for an absolute bonanza in the first quarter or two should oil prices remain suppressed.
We believe oil prices are unsustainably low and that equilibrium will move higher over the next twelve months due to supply response, but for the likes of JetBlue, Qantas (ASX: QAN, initial buy $1.31), Dart Group (LSE: DTG, initial buy 259p) and Ryanair (LON: RYA, €12.95) the near term financial windfall can be put to good use, paying down debt or upgrading fleets.
And while the turbo boost from lower fuel prices is nice, our investment case for these airlines include other strands that we believe will generate value for shareholders.
In the case of JetBlue, we like its differentiated ‘budget airline’ offering, strong reputation, attractive route network, expansion opportunities and other initiatives that are likely to boost the company’s fortunes in 2016 and beyond.
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