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.
