Jan 22 (Reuters) - U.S. airlines gave bullish guidance this week for their first-quarter results, buoyed largely by plummeting fuel prices.
Four airlines said they will save hundreds of millions of dollars in fuel costs starting this year, with global oil prices down more than 57 percent since June. Fuel is the biggest variable cost for airlines, often representing a third or more of total operating expenses.
Fourth-quarter results did not fully reflect the windfall, because many airlines failed to anticipate the steep oil price slide, and made fuel hedges months ago that ended up costing the carriers hundreds of millions of dollars.
On Thursday, Alaska Airlines projected a group low of $1.85 per gallon for the first quarter, down from $2.64 in the fourth quarter of 2014. United Airlines said it will pay between $1.96 and $2.01 per gallon for the quarter, down from $2.83 in the prior quarter. Southwest Airlines said it will pay $1.90 per gallon in the first quarter, down from $2.62 the previous quarter.
Southwest said that will represent savings of about half a billion dollars from the first quarter of 2014.
CRT Capital Group analyst Michael Derchin said United’s forecast to have a pre-tax profit margin between 5 percent and 7 percent was the “biggest surprise” Thursday.
“I can’t even remember when they made this much money in the first quarter because of the seasonality of their operations,” he added.
Chicago-based United has limited the impact of winter storms and reduced the need for flight cancellations because of an emphasis on capacity discipline.
Southwest projected lower unit costs as well, and Alaska said 50 percent of its fuel consumption in the first quarter is covered by hedge contracts. Derchin said this suggests the carrier has added new hedges since the oil price drop to arrive at its low fuel cost projection.
“We anticipate another strong day for airline equities, largely coming on the back of a triumvirate of bolstered guides, offering continued evidence that fuel cost savings are winding up in shareholders’ pockets, where they rightfully belong, in our view,” JPMorgan analyst Jamie Baker said in a research note.
Still, settling losing hedges cost United $225 million last quarter, pushing results below analysts’ expectations. On Tuesday, Delta Air Lines reported a loss of $712 million last quarter largely due to a $1.2 billion charge for hedge settlements.
In Thursday morning trading, United’s shares rose about 4.54 percent, Southwest’s shares were up about 6.41 percent and Alaska’s shares were up about 3.18 percent. (Reporting By Jeffrey Dastin in New York; Editing by David Gregorio)