Mary Schlangenstein and Michael Sasso (c) 2014, Bloomberg News. DALLAS — North American airline earnings will climb 73 percent to $19 billion in 2015, bolstered by lower jet fuel costs, a Bank of America Merrill Lynch analyst forecast.
Glenn Engel raised earnings estimates Monday for nine U.S. and two Canadian carriers as a result of the decline in prices for oil, which is refined into jet fuel. Airlines also will benefit as lower energy costs give consumers more discretionary income they may spend on travel, he said.
Earnings that match Engel’s forecasts would extend a turnaround among U.S. carriers that racked up $58 billion in losses from 2001 to 2009 before returning to profit in 2010. Executives at American Airlines and Delta Air Lines have said they expect to report record results this year.
“We continue to believe that the recent decline in jet fuel prices represents significant upside to airline EPS, if sustainable,” William Greene, a Morgan Stanley analyst, said Monday in a report to investors.
Oil prices fell to the lowest level since July 2009 after the Organization of Petroleum Exporting Countries failed to cut output on Nov. 27 in response to a glut in supply. Prices that have since rebounded remain down 31 percent this year.
Engel’s outlook assumes an average price of $81 a barrel for Brent crude in 2015. He also forecast an industry profit this year of $11 billion.
Jet fuel for immediate delivery in New York harbor has tumbled 30 percent this year as low as to $2.21 a gallon, its lowest intraday price since October 2010, according to data compiled by Bloomberg. Even with the lower prices, fuel remains among the top costs for airlines.
American, the world’s largest carrier, spent $8.4 billion on fuel for jets in its primary fleet during the first nine months of this year. It was the largest single expense and accounted for about one-third of the airline’s operating costs.
The oil price decline “should be a net benefit to the industry,” David Fintzen, a Barclays analyst in New York, said in a telephone interview. “It takes a little time to see how much of a net benefit. The risk is that that market gets ahead of oil changes.”
The analyst said Delta’s hedges, or financial instruments designed to protect against price spikes, and profit sharing limit its benefit from lower fuel costs while Alaska was cut based on its market-share battle in Seattle with Delta.
Helane Becker, an airline analyst at Cowen & Co. in New York, is cautious in evaluating the effects of falling fuel prices.
“We think that can turn just as quickly so we haven’t really adjusted our estimates for next year,” Becker said in a phone interview.
Still, signs look strong that airline fares will remain intact, she said. In the past, lower fuel prices eventually led to a drop in fares because the underlying cause was a slowing economy. This time, the economy still seems robust and the drop in fuel costs is resulting from an oversupply, Becker said.
Airlines so far haven’t shown any sign of dropping ticket prices amid strong consumer demand, she said.
— Sasso reported from Atlanta.