Source: The Standard Author: Benjamin Scent 07/17/2008
Subject Concerned: Opinion Airlines Aviation Fuel
The sharpest fall in US crude futures in more than 18 years is unlikely to spark a complete recovery in airline stocks.
But the US$6.44 plunge in US crude futures during New York trade on July 15 will allow some light to shine on the beleaguered airline industry.
Airline shares have been hammered in the past six months as fuel prices, which make up 30 to 40 percent of airline costs, have surged. Top market players, however, are saying oil is long overdue for a correction.
Vulture investor Wilbur L Ross announced plans on July 15 to pour US$80 million into SpiceJet, a struggling Indian budget airline, in the belief that crude prices have entered bubble territory and are set to tumble within 12 months.
"The fundamentals don't justify an oil price over US$100," Ross told The New York Times. "It is the nature of bubbles that they expand farther and last longer than anyone logically imagined ...[but] they always reverse."
Ross's predictions echoed earlier comments from famed Texas wildcatter Boone Pickens, who recently said oil prices will not rise much above US$150 a barrel and will eventually fall to about US$100 a barrel.
Lehman Brothers is also predicting oil prices will drop. However, local market watchers said it may not be prudent to buy Hong Kong-listed airline stocks yet.
"Just remember to look at the oil price, instead of looking at the stock price of the airline companies," said Sun Hung Kai Financial strategist Castor Pang Wai-sun.
A decline in the price of airline stocks may make them look like good value, but unless oil prices fall much further, the carriers will continue to be pummeled by the high fuel costs, making many of their routes unprofitable.
July 16's rally in Cathay Pacific was due to the stock being oversold recently, said KGI Asia chief operating officer Ben Kwong Man-bun.
"It's bound to have some rebound, but that doesn't mean that the worst is over," Kwong cautioned.
"It all depends on how long the oil price will keep coming down."
If you already hold airline shares, you can keep holding on to them, but it is not worth buying more, even after July 15's sharp drop in oil prices, according to Prudential Brokerage associate director Kingston Lin King-ham.