The Guggenheim Airline (NYSEArca: FAA) exchange traded fund (ETF) is back in action today, up more than 2% on stronger earnings and a robust outlook. As oil prices rise, however, they could wind up bringing this fund back to Earth.
Airline revenue has already taken a hit from the slight increases in oil prices, since fuel prices make up at least a third of operating expenses, reports Susan J. Aluise for InvestorPlace. Earnings likely would have come in better had revenue not been gobbled up by fuel spending.
Now some airlines have forecast that rising fuel prices will cost them another $1 billion this year. The pressure is on to find some form of relief. To combat prices, airlines are exploring fare hikes, fuel-efficient planes, reduced service and – you had to know this was coming – more fees.
The likely response airliners will take is to raise ticket prices. However, Ray Neidl, senior aerospace specialist at Maxim Group, remarked that raising tickets prices can only go so far, and if prices exceed $100 a barrel, it will become harder to pass on costs to customers. Airliners will be able to boost profitability if oil prices stay around $85 to $95 a barrel, comments Lee Ann Tegtmeier for Aviation Week.
At least fourth-quarter earnings have come in strong.
- Southwest Airlines (NYSE: LUV) reported a 13% rise in revenue for the fourth quarter on passengers returning to flight, writes Heather Struck for Forbes. Revenue jumped 14% year-over-year, while costs for the company came from a $1.4 billion bid to buy AirTran and fuel-hedging costs. [Giving the Airline ETF a Pat-Down.]
- US Airways (NYSE: LCC) reported earnings that far surpassed analysts’ expectations on Wednesday.
- Alaska Air (NYSE: ALK) notched profits beyond expectations, as well, citing a “record year in nearly every regard.”
For more information on the airline industry, visit our airlines category.
- Guggenheim Airline (NYSEArca: FAA) owns 14.9% of Southwest, 4.8% of Alaska Air and 3.9% of US Airways.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.