Although high fuel prices and threats of terrorism have scared many individuals out of airline stocks, the astute investor can still make money in the sector. That is, if they know what to look for. In this article, we'll give you a list of seven tips and recommendations for researching and selecting the best airline stocks to own.
1. Analyze Fuel Hedging
Some airlines try to pass higher fuel costs on to their customers in the form of a fuel surcharge. But the most efficient way to mitigate fuel costs (particularly over time) is to purchase futures contracts that lock in a company's fuel supply for the coming year at a set price. (To read more about fuel prices, see Getting A Grip On The Cost Of Gas and Fueling Futures In The Energy Market.)
To be clear, all airlines do some hedging. But some companies hedge more than others. As such, they are better prepared, should oil prices skyrocket. For example, Southwest Airlines hedged as much as 85% of its annual fuel usage over the past six years. The move effectively locked in consumption at $26 per barrel of oil, which in turn saved shareholders an estimated $1.8 billion (from 1999 to 2005). Conversely, other airlines such as Alaska Air hedged a smaller percentage of their expected fuel consumption, and as a result their annual savings were much less during that same time period.
In any case, investors should review the company's financial statements (Form 10-K / 10-Q) for information about its hedging activities. While there is no hard and fast rule, investors should look favorably upon companies that hedge at least 30% of their expected annual fuel usage. Anything less than that and the company may be putting itself at significant risk should oil prices really fly.
1. Analyze Fuel Hedging
Some airlines try to pass higher fuel costs on to their customers in the form of a fuel surcharge. But the most efficient way to mitigate fuel costs (particularly over time) is to purchase futures contracts that lock in a company's fuel supply for the coming year at a set price. (To read more about fuel prices, see Getting A Grip On The Cost Of Gas and Fueling Futures In The Energy Market.)
To be clear, all airlines do some hedging. But some companies hedge more than others. As such, they are better prepared, should oil prices skyrocket. For example, Southwest Airlines hedged as much as 85% of its annual fuel usage over the past six years. The move effectively locked in consumption at $26 per barrel of oil, which in turn saved shareholders an estimated $1.8 billion (from 1999 to 2005). Conversely, other airlines such as Alaska Air hedged a smaller percentage of their expected fuel consumption, and as a result their annual savings were much less during that same time period.
In any case, investors should review the company's financial statements (Form 10-K / 10-Q) for information about its hedging activities. While there is no hard and fast rule, investors should look favorably upon companies that hedge at least 30% of their expected annual fuel usage. Anything less than that and the company may be putting itself at significant risk should oil prices really fly.
No comments:
Post a Comment