Despite the sharp drop in ticket prices, the airline companies are still enjoying hefty profits due to the plunge in oil prices. JetBlue Airways Corporation (NASDAQ:JBLU) has performed better than its competitors and will continue to fare well due to its innovative revenue generating plans. The company is modifying its hedging plans to benefit most from the decline in oil prices.
The scenario
The unexpected plunge in crude oil prices proved to be a blessing for the airline industry over the last few months. However, the airlines companies were not ready to pass on the fare benefits to their customers. They continued with high air fares due to the strong demand prevailing in the industry. Now, finally the air travelers have entered in a phase where the airline companies are passing some benefits to their customers.
The Bureau of Labor Statistics disclosed that air fares declined 3.1% sequentially last month and they are down 6% YOY. This decline comes after a 5.6% decline in air fares in the month of July, the sharpest monthly decline in 20 years.
The impact
The weak air fare environment is not encouraging news for the company. In fact, lower air fares prompted Spirit Airlines to reduce their margin guidance. Consequently, its share price had declined nearly 40% in the past few months. There is a growing fear that airline companies including JetBlue will cannibalize their fuel savings by minimizing fares to extend market share.
Here, it is important to analyze how the weak fare environment will impact airline stocks like JetBlue? Historically, the airline firms tried to extend their market share by competing on prices. Airline companies have learned from past and therefore are now staying away from price competition. Despite the weak fare environment, airline companies are sitting on large profits as oil prices are declining much faster than air fares. While fares are down 6% YOY, fuel prices have plunged more than 35% in the same period.
JetBlue Airways Corporation (NASDAQ:JBLU) will continue to make significant profits as it is changing its hedging plan to benefit from the oil plunge.
