Why the rising oil price is bad news for Qantas Airways Limited

As the oil price surges, it means higher costs for Qantas Airways Limited (ASX:QAN)

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

News overnight suggests that OPEC is close to an agreement to cut oil production, which should see oil prices rise.

In fact, the oil benchmarks, Brent Oil and WTI Oil gained 5% and 4.5% to close at US$48.27 a barrel and US$46.66 a barrel respectively overnight.

More gains could be ahead once OPEC's final output details are worked out – but it's all bad news for airlines, including Qantas Airways Limited (ASX: QAN).

In the last financial year, Qantas spent $3,235 million on fuel, down $664 million from FY2015. That was mainly due to lower oil prices. Qantas also saved $597 million in fuel costs in the 2015 financial year. In the 2014 financial year, Qantas spent $4,496 million on fuel.

And while Qantas hedges a large percentage of its fuel expenses, the airline will have to hedge at higher prices as contracts roll off if oil prices are higher. The company could also pass through the higher costs to customers that it can't hedge against, although that is limited by what its competitors do.

If Virgin Australia Holdings Ltd (ASX: VAH) and Qantas' international competitors don't pass on higher fuel costs to customers and Qantas does, it could lose market share.

The good news is that oil price is unlikely to rise too high, because the higher the oil prices goes, higher-cost US shale drillers are encouraged back into the market. Shale drillers have also found some innovative ways to dramatically cut costs.

That has the effect of putting downward pressure on oil prices.

Foolish takeaway

Trading at $3.13, Qantas shares sport a P/E ratio of just over 6x earnings – evidence the market expects earnings to fall this financial year. That could fall further if oil prices continue to rise.

 

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »