What are we looking for?
Profitable global airlines with heavy fuel-cost exposure that stand to benefit from declining oil prices.
The screen
Oil prices have retreated in recent weeks as the United States and Iran continue negotiations to end their conflict, reversing the supply-risk premium that pushed crude sharply higher earlier this year. West Texas Intermediate crude recently traded at US$68.76 per barrel and Brent at US$72.10, and U.S. Federal Reserve Chairman Kevin Warsh noted that energy prices have declined significantly since the two countries reached a memorandum of understanding. Few industries feel oil prices more directly than airlines. Jet fuel is typically the single largest airline expense, accounting for 25 to 30 per cent of total costs globally, according to the International Air Transport Association, meaning falling crude flows almost directly into wider margins.
Using FactSet’s screening tool, I identified global airlines poised to benefit from declining oil prices by applying the following criteria:
- market capitalization greater than US$1-billion
- operating margin greater than 5 per cent
- positive net income over the trailing 12 months
- passenger load factor (the share of available seats filled) greater than 80 per cent
- fuel costs greater than 20 per cent of total operating expenses
The seven companies that passed were ranked by a multifactor composite of EV/EBITDA (earnings before interest, taxes, depreciation and amortization), price-to-earnings, net income margin, and fuel cost as a percentage of total expenses, with higher fuel exposure ranked more favourably, as those carriers have the most to gain from cheaper crude.
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What we found
Ryanair Holdings PLC RYAAY-Q, Europe’s largest airline by passengers, ranked first on the screen with fuel representing 41.4 per cent of total expenses, the highest exposure in the group. For the fiscal year ended March 31, the company reported profit after tax of €2.26-billion (US$2.6-billion), a 40-per-cent increase over the prior year, driven by an 11-per-cent rise in revenue as traffic grew 4 per cent to a record 208.4 million passengers and revenue per passenger climbed 7 per cent. The airline repaid its final €1.2-billion bond in May, leaving it effectively debt-free, and has hedged 80 per cent of its fiscal 2027 fuel requirements at US$67 per barrel, which management said locks in roughly 10-per-cent fuel savings versus the prior year. Despite these results, the stock trades at 11.7 times earnings. The company reports results for its first quarter ended June 30 on July 20.
Copa Holdings SA CPA-N, a Panama City-based carrier connecting the Americas, ranked second with valuation multiples of 6.6 times earnings and 6 times EV/EBITDA. For the first quarter ended March 31, Copa reported net profit of US$212.5-million, with earnings per share up 20.5 per cent year-over-year to US$5.16. The results were driven by 14-per-cent capacity growth and 15-per-cent traffic growth that lifted its load factor to 87.2 per cent. Unit costs excluding fuel fell 1 per cent in the quarter, which management attributed to continued cost discipline, helping offset a 7.5-per-cent rise in jet fuel prices that should now reverse into a tailwind as crude declines. In April, the company announced an order for 40 Boeing 737 Max aircraft with 20 purchase options, with deliveries expected between 2030 and 2034, to support long-term growth.
The information in this article is not investment advice. The author assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained above.
Arjun Deiva, CFA, is an MBA candidate at the University of California, Berkeley, Haas School of Business.