Airline shares rise on lower oil
Investors around the world snapped up airline shares yesterday as the plummeting price of oil helped them forget two high-profile bankruptcies in the last week, but analysts warn there's still plenty of turbulence expected in the ailing industry.
"Lower oil prices basically takes away the immediate threat of bankruptcy," said Ray Neidl, an airline analyst at Calyon Securities. "A lot of airlines have seen their shares overly hit, and lower oil takes away some of the risk."
WestJet Airlines Ltd. added 3.8 per cent to $15.50 a share, while Air Canada's B shares added 2.7 per cent to $4.89, while the widely traded A shares closed down 1 cent at $4.86. American Airlines parent AMR Corp. gained 11 per cent to $11.50 (U.S.), while European airlines also posted strong daily gains.
Airline profits have tumbled this year as airlines work to restructure in order to deal with record high oil prices. American carriers plan to cut capacity by 10 per cent by the end of the year, and airlines around the world have introduced fuel surcharges to deal with higher costs.
Ottawa-based Zoom Airlines went into creditor protection last week - leaving thousands of passengers stranded in North America and Britain - as the increase in the price of aircraft fuel added $50-million (Canadian) to its operating costs in the last year.
Italian state-owned carrier Alitalia sought bankruptcy protection on Friday, saying it was losing $3-million (U.S.) a day and had amassed $1.7-billion in debt as it struggled with high fuel prices and fierce competition from discount carriers. The airline is still flying, but officials said yesterday a restructuring plan must be implemented in the next two weeks before it runs out of operating cash.
For a recovery to take hold in the industry, Mr. Neidl said "oil needs to go down to $80 [U.S.] a barrel and ticket prices have to keep going up."
Oil settled around $110 a barrel yesterday, after trading as high as $147 in July. Already on the way down on fears of a global recession, prices fell quickly after reports indicated that hurricane Gustav missed oil and gas installations in the Gulf of Mexico over the weekend.
Research Capital analyst Jacques Kavafian said Air Canada saves $25-million every time a barrel of oil decreases by a dollar. WestJet, he said, saves $7-million.
"There is absolutely no downside for the airlines when oil goes lower," Mr. Kavafian said. "The airlines benefit immediately - the same day."
Air Canada said at the beginning of the summer that it hedged 49 per cent of its fuel requirements for the rest of the year between $94 and $101 a barrel. WestJet also hedges about 50 per cent of its fuel costs, with prices in the current third quarter set around $136 per barrel.
Meanwhile, lower oil costs haven't yet translated into lower surcharges.
A WestJet spokesman said yesterday that the company introduced its fuel surcharge as a temporary measure, and that it could revisit the policy if the price per barrel settled around $100. "When it was introduced it was with an eye on removing it, if we saw oil return to normal levels," said Richard Bartrem, director of brand and communications. "We're getting there, but we're not there yet."
Air France, one of the most recent airlines to add surcharges, indicated it would rescind the extra charge if oil stayed around $125 a barrel. Air Canada was not available for comment.
reportonbusiness.com: Airline shares rise on lower oil
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