American Airlines has become the latest airline to see the effects of the rising costs of fuel. The news is huge for the industry, meaning that American’s share price dropped to a 2 year low in reaction the airline’s third-quarter profits. The cost of aviation fuel has been steadily creeping up over the past few years meaning that profit margins have been sliding for airlines. In response, some airlines have been forced to raise fares in order to stay profitable. So far we’ve seen Emirates look to stabilise costs following the increase in fuel prices.
American Airlines Shares Fall
The news of the effects of increased fuel prices caused shares in American Airlines to fall to their lowest in two years. As a matter of fact, in the past 5 years, the airline’s shares have only dropped below their current value 3 times. If you look at the history of American Airline shares, their historic low occurred around November 2008 when shares were worth 2.85, less than a 10th of their current value of 31.61. The drop is the biggest recorded on Standard & Poor’s US airline index. With a decline of 36% this year, American Airlines shares have fallen the most of any US airline this year.
The reason for the surprising drop in shares is because American Airlines had been forecasting for fuel increases to be less severe than they were. American Airlines had been making their price forecasts for the year with an expected maximum fuel price of $2.27 or less per gallon. This was an underestimation as fuel instead rose up to $2.33 per gallon.
No Fuel Hedging
American Airlines doesn’t hedge its fuel prices. Hedging is when an airline will buy aviation fuel contracts. Instead, the airline buys fuel at market rate. While this means that if the price of fuel goes down, the airline pays lower costs. It also means that should the cost increase as is the case, then the airline pays the higher rate.
Speaking about the drop in shares, Savi Syth, an airline analyst at Raymond James Financial Inc. provided Bloomberg with a financial background. “I am surprised by the weakness in American shares. We thought the update was positive. And while fuel has moved higher, shares already fell on that.”
Adam Hackel, a Capital Analysist commented: “A lot of these guys don’t have the same hedge books they used to, but American came out early and said ‘We’re not going to hedge fuel.’ Within the market, they are known as the unhedged guy.”
The third quarter profits of the airline have also reportedly been affected by $50m as a response to the 2,100 flights which were cancelled as a result of Hurricane Florence in September.