Let's face it; the only "going green" that airlines care about is keeping quarterly reports out of the red. However, environmentalists and investors can find common ground when it comes to airlines' increasing focus on cutting fuel costs. Oil prices have plagued the airline industry for as long as it's existed, devastating well-run companies that couldn't manage to quit their gas-guzzling habit. Read below to discover exactly what you need to know to ensure that your plane portfolio is properly protected from petrol.
A piece of the petroleum pie
Flipping through the pages of an airline's 10-K, the first number that any self-respecting company reports is its fuel expenditures as a percentage of total expenses. While this statistic obviously depends on more than just an airline's fuel use, it's an excellent indication of how much money is being poured straight into the fuselage and out the jet engines.
Source: Author, data from company 10-K reports & www.ioga.com.
It doesn't take an oil analyst to see that crude oil prices correlate almost perfectly with fuel expenditures. What is of interest, though, is a company's ability to shoulder shifting prices and continue with operating expenses as usual. This ability usually depends on (a) how well a company hedges oil prices and (b) how much control it has over price negotiations with oil suppliers. For a relatively small company like JetBlue Airways (Nasdaq: JBLU), we can see how it gets bounced around amid price volatility. For companies that remain slightly more steadfast, Southwest Airlines (NYSE: LUV) has reported great successes in hedging and Delta Air Lines (NYSE: DAL) remains consistent due to both its size and hedging.
Better than a Prius?
A little-used statistic that deserves a lot more clout in the airline sector is miles per gallon per available seat mile. We analyze MPG every time we buy a car, but this basic measurement of fuel efficiency has escaped airline industry analysts for far too long. By dividing available seat miles (industry lingo for total miles every plane travels times its passenger capacity) by total fuel gallons consumed, we're left with a very useful metric.
Source: Author, data from company 10-K reports.
Introducing JetBlue, the "Prius of the skies." With an average 71.4 MPG per available seat mile over the past four years, JetBlue has consistently blown away its competition, showing that fuel expenditures as a percentage of total operating expenses is only one part of a more intricate story. United Continental Holdings (NYSE: UAL) and Delta do necessarily use less fuel efficient planes for their longer international flights, but United's significant advances in the past year provide evidence that change is possible. Delta, on the other hand, continues to flap along at an underwhelming 60.5 MPG per available seat mile.
Aging airplanes
In assessing an airline's addiction to fuel, there's one more variable to add to the equation that, although not directly linked to fuel usage, is quite possibly the most important indicator of future fuel efficiency: fleet age.
Airline companies publish their average fleet age every year, allowing investors to consider repair costs, future airplane orders, and (you guessed it) fuel use. Here's the line-up for current fleet age:
- Delta: 15.6 years
- United: 12.4 years
- Southwest: 10.9 years
- JetBlue: 6.1 years
Not surprisingly, the age of each airline's fleet correlates directly to its fuel efficiency. Thanks to manufacturers like Boeing (NYSE: BA) and Airbus, airplanes are continuing to consume less fuel to fly us from point A to point B. Boeing claims its new 737 MAX beats current comparable airplanes' fuel use by a whopping 13%, translating to an average of nearly two million pounds of saved fuel per plane per year. Here's a quick look at what each airline is doing to update its fleet:
Source: Author, data from Boeing, Airbus, and www.planespotters.net.
As if Delta's lackluster historical fuel efficiency wasn't bad enough, orders for new planes account for only 15% of its fleet, less than half of what United and Southwest are planning on purchasing. JetBlue, the little jet engine that could, will take on new orders amounting to 122% of its current fleet over the next few years. Looks like the new kid on the block will get a little newer.
Petrolophobia, a rational fear
Many people suffer from pteromerhanophobia, a fear of flying. What I can't understand is why airlines such as Delta don't seem to suffer from what I call "petrolophobia," a fear of high oil prices. Whether you call yourself an environmentalist, an investor, or both, I think most would agree with these facts:
- Oil is a non-renewable resource.
- Oil prices will continue to trend upwards long term.
- Commodity dependence is a recipe for disaster.
JetBlue and Southwest continue to respond rationally to petrolophobia, with United quickly catching on to the lucrative opportunities awaiting fuel efficient airlines. Delta, the gas guzzler of the skies, could be heading into turbulence and needs to adjust quickly to remain competitive.
Despite all this analysis, there's only one thing that's for sure in the airline industry: Nothing's for sure in the airline industry. That's why investors might feel safer with a non-cyclical stock that our Chief Investment Officer has picked out for its excellent growth prospects. This stock has so much promise that we've dubbed it The Motley Fool's Top Stock for 2012. Simply click here to access your free report with name and analysis of this winner.
