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Falling oil sees the Qantas share price takeoff

Credit: Joits

Qantas Airways Limited (ASX: QAN) has seen its share price gain 4.9% today to $3.86 in lunchtime trading after oil prices fell to seven-year lows.

Fuel is the airline’s major expense, costing Qantas $3.9 billion in the 2015 financial year (FY15) and $4.5 billion in FY14. While Qantas does hedge against the price movements in aviation fuel for up to two years, lower oil prices mean that Qantas does gain some benefit as hedging contracts roll over when prices are low.

Overnight, oil prices fell to their lowest levels in seven years with Brent Crude falling 5.3% to US$40.70 a barrel and West Texas intermediate (WTI) hitting US$37.63 a barrel, the lowest level since 2009.

The Organisation of the Petroleum Exporting Countries (OPEC), which consists of major oil exporting countries including Saudi Arabia, Iraq, Iran, Kuwait, Libya, Indonesia and Venezuela, met overnight to discuss a ceiling on production but failed to reach any agreement.

That threw the markets into a spin with fears of a global glut of oil. According to The Guardian, Saudi Arabia needs oil back at US$100 a barrel to balance its budget, but is gambling that lower oil prices will see unconventional, higher production cost oil like US shale knocked out of the market.

So far, that hasn’t happened, but the lower oil prices go, the more high-cost oil production is under pressure to close, thereby reducing global supply.

Perhaps surprisingly, Virgin Australia Holdings Ltd (ASX: VAH) has only seen its share price rise 1.1% today, suggesting lower oil prices aren’t a huge benefit like they are to Qantas. Virgin is primarily a domestic carrier and it’s fuel bill was only $1.2 billion last financial year, virtually unchanged from the previous financial year.

Foolish takeaway

While the oil price crash provides a nice tailwind for Qantas now, it’s not necessarily the ‘new normal’ and prices could begin heading north at any time. Should that happen, the Qantas share price is likely to head to a lower altitude.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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.

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