Concierge gives you timely BUY and SELL alerts on ASX-listed stocks
The relationship between the performance of Airline stocks and fuel prices has seemingly been forgotten in the past couple of years given the travel boom. But in recent days, investors’ attention has been drawn to this once more.
The relationship between airline stocks and fuel prices
An airline’s fuel bill is one of the main costs to an airline. The higher fuel prices are, the lower their margin – at least in theory. In practice, it isn’t always this simple for several reasons. One is that airlines hedge fuel prices and can sometimes be wrong. Qantas’ bet in late 2019 that fuel prices would remain high but the drop in oil prices meant it lost that bet.
At certain times, demand for travel is so high that airlines can get away with charging higher prices. This has been the case for nearly 2 years now – but for how much longer?
Update from Air New Zealand is a wakeup call for investors
Air New Zealand (ASX:AIZ) held its AGM earlier this week, barely a month after reporting its annual result (which it did on August 24). The airline declined to provide investors guidance given ongoing uncertainty and volatility of various macroeconomic factors including fuel prices as well as the weak New Zealand dollar, wage inflation, international competition and increased airport charges. It also reported softening corporate and domestic demand in recent weeks.
Qantas sees rising fuel prices too
Turning to Qantas, it told its investors that fuel prices rose by around 30% since May 2023, including a 10% spike since August. If sustained, the company’s fuel bill would rise by $200m to $2.8bn after hedging. A further $50m impact was expected due to forex charges. ‘The Group will continue to absorb these higher costs, but will monitor fuel prices in the weeks ahead and, if current levels are sustained, will look to adjust its settings,’ it said. ‘Any changes would look to balance the recovery of higher costs with the importance of affordable travel in an environment where fares are already elevated’.
You can see that not only are fuel prices rising but weak currencies are making the issue worse than it otherwise would be, given that fuel is typically paid in USD regardless of what currency the airline takes the majority of its payments in (Aussie and New Zealand dollars for both Qantas and Air New Zealand).
Not just an ASX issue
This problem is not unique to Qantas and Air New Zealand. American Airlines, Spirit and Southwest have all been punished by investors after warning of the impact of fuel prices.
The first of these airlines was expecting a bill of $2.55-$2.65 per gallon in fuel but changed this to $2.90-$3 per gallon of fuel in less than two months. The other two did not issue a fuel bill guidance but announced significant margin downgrades as travel demand (at least domestically) wanes off.
This is one of many reasons why you should never buy an airline
It’s a common saying that you should “never buy an airline” because of the high costs and risks associated with running such a business. Qantas will be facing a bill of at least $12bn to renew its fleet.
We think the recent fates of these companies reiterates this. Even if you think the travel boom will keep rocking forever and ever and ever, there are better ways to gain exposure to it. Travel agency stocks are one such example because many of them are leaner businesses post-pandemic. Accommodation stocks are another example but not all will be a safe bet.
But for airline stocks, their fuel bills could grow further before they shrink.
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