The airline sector is clearly feeling the crunch from the rising oil costs. Along with trying to restructure their operations to produce a more cost effective operation, airlines are again facing high oil prices. The light crude futures contract on the NYMEX traded at over $75 a barrel last Monday prior to succumbing to some selling pressure on Tuesday.
For airlines, the price of jet fuel continues to advance higher as prices traded at over $90 a barrel on the Gulf Coast spot market, a historical high excluding the Hurricane Katrina impact.
As I have discussed in past commentaries, the trend for oil prices is bullish in the near and mid-term. If you extend out the rising trendline, it can be seen that oil could inevitably touch $100 a barrel in the future. For the airline industry, which is finally seeing some positive signs on the capacity front, the renewed strength in oil price is not welcomed.
While the top discount carrier, Southwest Airlines Co. (NYSE/LUV) is managing to hold, rivals such as JetBlue Airways Corp. (NASDAQ/JBLU) and Frontier Airlines Holdings, Inc. (NYSE/FRNT) are down close to 50% and are near their respective 62-week lows.
Taking the contrarian approach and buying when no one else wants to, picking up shares in a well-run company such as Frontier Airlines would make sense for some risk capital. Denver-based Frontier, with 49 Airbus 300 series jets, operates 47 direct routes primarily in the United States, but has also launched popular routes to seven sun destinations in Mexico.
Frontier is also looking at the possibility of offering transborder routes between the United States and Canada. While it is a valid idea, the high cost of airport landing fees in Canada, and especially in Toronto, would make low pricing difficult to maintain.
The airline sector may be in a mess now but I believe industry fundamentals are improving. If only we can get rid of the high oil prices!
In the meantime, keep an eye on Frontier; a stock that I believe has what it takes to succeed. But then again, if you want the grand daddy of discount airlines, look no further than Southwest.