Airline Qantas Airways Limited (ASX: QAN) saw its share price rise 7% today to $1.92, on the back of plummeting oil prices.
Fuel for its planes is the airline's major cost input – in the 2014 financial year, Qantas spent $4.5 billion, well above the next highest cost of $3.7 billion in staff costs. Perhaps surprisingly, Air N.Z. FPO NZ (ASX: AIZ) only saw its shares rise 3.3% while Virgin Australia Holdings Ltd (ASX: VAH) shares were flat for the day.
Oil prices have plummeted from above US$100 per barrel in June, to dip US$70 per barrel overnight. The chart below shows the recent fall.
Source: NASDAQ
As you can imagine, a 30% fall in the oil price should have a substantial impact on Qantas's fuel bill. Unfortunately for investors, it's not quite as simple as that.
Because fuel makes up such a large percentage of the airline's expenses, Qantas takes out hedges to protect it from rising oil prices. As such, that means the airline is locked into higher prices, until those hedges rollover, expire or are exercised. It also means the airline doesn't benefit as much as it could from oil prices heading the other way – down.
And then you also have the Australian dollar, which has dropped 9.6% since the end of June. That is also a negative factor in determining the cost of the airline's fuel, which is priced in US dollars.
At the end of the day, Qantas is still not an investment grade company, no matter where the oil prices go. Oil could easily soar back above US$100 a barrel in quick time, if global oil production is threatened or oil producers take their foot off the gas pedal (pun intended).
And that could happen as more unprofitable oil producers close for business, especially US shale operators, who are estimated to be at the high end of the cost curve, as we noted earlier today.
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