In a surprisingly lopsided decision on Sunday, the Greek people voted "no" to the bailout conditions proposed by Greece's EU creditors. This decision raises the possibility of Greece being forced to leave the Eurozone and print its own currency. It also increases the chances that its creditors will be forced to take big writedowns on the Greek debt they hold.
As this crisis continues to unfold, investors may be wondering what it means for the three global carriers that dominate the U.S. airline industry: American Airlines (NASDAQ:AAL), Delta Air Lines (NYSE:DAL), and United Continental (NASDAQ:UAL).
Fortunately, the problems in Greece are unlikely to impact demand very much at American, Delta, and United. Meanwhile, another big drop in fuel costs -- driven in part by the news out of Greece -- will more than offset any revenue losses.
Airlines' direct exposure to Greece is minimal
The biggest reason the major airlines can breathe easy is that they don't get much revenue from Greece in the first place. Despite having a solid transatlantic presence thanks to its hubs in Newark and Washington, D.C., United Continental doesn't fly to Greece at all. Its customers need to connect to United's Star Alliance partners in Europe to complete their journey.
American Airlines and Delta Air Lines do fly to Athens, but only seasonally. Delta actually increased its capacity to Athens this summer, operating 11 weekly flights during the peak season.
Even at this level, flights to Athens represent a tiny fraction of Delta's more than $40 billion in annual revenue. Furthermore, the seasonal nature of American Airlines' and Delta Air Lines' flights to Athens highlights an important fact: Most of the demand is driven by tourists heading to Greece.
This tourist demand is much less sensitive to economic dislocation than business travel demand. Indeed, the fact that Greece has been in the news so much -- along with falling prices in the country -- has actually increased tourist demand, according to Reuters. (It just goes to show that there's no such thing as bad publicity!)
But lower fuel prices are a big deal
Whereas American, Delta, and United have minimal direct revenue exposure to Greece, they have plenty of exposure to fluctuations in oil prices, and the crisis in Greece has contributed to a big drop in oil prices. (Other important factors include an economic slowdown in China, strong oil production in the U.S., and a potential boost in Iranian oil exports later this year.)
On Tuesday morning, August Brent crude futures fell below $56 for the first time in months before recovering somewhat around noon. The price has plummeted more than 10% since the beginning of last week and has fallen about $10 per barrel in the past month.
This could send jet fuel prices sliding back toward the lows reached in early 2015. A $10-per-barrel drop in oil prices would save American, Delta, and United about $1 billion each, annually, before the impact of hedges. This will easily outweigh the revenue impact of the Greek crisis.
Furthermore, the airlines are all in great position to profit from lower oil prices now. American Airlines unwound its last remaining fuel hedges last year. United Continental has significantly reduced the scale of its hedging in the past year or so as well. Finally, Delta closed most of its hedges for the second half of 2015 earlier in the year.
Contagion is the only real fear
The only way the situation in Greece could negatively affect the big U.S. airlines is if there is a "contagion" effect whereby Greece's economic problems spill over into Europe more broadly. While American, Delta, and United don't get much revenue directly from Greece, the larger countries in Europe do represent significant markets for them.
However, the risk of a broad spillover impact seems relatively modest. Greece's economy is barely more than 1% of the EU's economy as a whole. Most of its debt is now held by governments and international institutions, which can absorb losses better than banks and other financial institutions. And the European Central Bank appears ready to use aggressive monetary policy actions to keep the European economy growing.
Shares of American Airlines, Delta Air Lines, and United Continental have all tumbled 20% to 30% since late January. Worries about the Greek crisis have helped keep them grounded. But this event could actually be a blessing in disguise, as the impact of lower oil prices could power rapid earnings growth for all three airlines in the second half of 2015.