Friday 29 Mar 2024
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A fall in crude oil and jet fuel prices is generally positive for airline operators because fuel cost is the biggest cost component. Photo by Reuters

KUALA LUMPUR: Airline stocks are getting a lift from the slump in global crude oil prices, as fuel cost represents up to 40% of their operating costs, said analysts.

“A fall in crude oil price and correspondingly in jet fuel price is generally positive for airline operators because fuel cost is the biggest cost component, taking up to 40% of their operating costs. So, when oil price falls, so does their cost,” CIMB Research analyst Gan Jian Bo told The Edge Financial Daily.

Nevertheless, the influence of fluctuating oil prices will also be determined by the strength of the US dollar. As such, the actual impact of lower oil prices on airline companies will only be seen in their next quarterly results, said Gan.

“I would expect that savings in [lower] fuel cost would be offset by the strengthening US dollar. After all, operating costs for an airline is affected by a number of factors such as exchange rates and the size of the fleet,” he added.

Still, Gan expects airlines, which typically hedge about 40% of their jet fuel cost, to re-examine their hedging positions as oil prices continue to fall.

“Basically, airlines will think about reducing their hedging exposures as oil prices continue to decline so they can just purchase it at market price. Their fuel cost will be capped once they hedge, but this does not mean that it will be the lowest the oil price will go,” he said.

Gan said, however, the declining oil prices will only bring “very limited” savings to players in the transportation sector such as logistics and shipping firms.

He sees no “particular reason” for oil prices to rise in the next two to three years as US shale oil production increases and the Americans become more independent and less reliant on oil imports.

Brent crude slipped below US$97 (RM316.22) a barrel last Friday and headed for a third straight month of declines as slowing economic activity in Europe and Asia dampened demand for oil, while supply is on the rise.

MIDF Reseach analyst Chua Boon Kian also sees airlines benefiting from lower fuel bills in view of the easing jet kerosene price.

He pointed out that most global airlines have reduced their fuel hedging exposures in reaction to the falling price and waning volatility in crude oil market.

“As the peak travelling season in the final quarter looms, we expect that domestic carriers would benefit from lower fuel expenditure should the trend of lower fuel price continues,” he said in a report last Friday.

Eddy Tan, regional director of Gaffney, Cline and Associates — a consultancy firm which specialises in the oil and gas (O&G) industry — sees O&G companies with exploration and production (E&P) divisions and oil refineries benefiting from slipping oil prices.

“In general, lower oil prices will certainly impact the earnings of E&P companies and this will typically be reflected in their share prices. While some costs and taxes will reduce with declining prices, there are high fixed costs that cannot be reduced in the short term,” he said.

“Oil refiners, meanwhile, may benefit initially as product price decreases generally lag behind oil price decreases. However, the higher initial margins would soon erode,” Tan added.

“Large international oil companies have already curtailed their investment plans. We view this as a market correction and guess prices will be closer to US$90 per barrel of Brent oil for the next year,” he said.

Shares of AirAsia Bhd have risen 6.5% to close at RM2.47 last Friday from RM2.32 on July 1, while AirAsia X Bhd’s share price was up 13.7% to 79 sen from 69.5 sen in the same period. Malaysian Airline System Bhd shares have risen 24.4% to 25.5 sen from 20.5 sen in early July.


This article first appeared in The Edge Financial Daily, on September 29, 2014.

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