Lower Oil Prices Lead To 'Temporary Windfall' Profits For U.S Airlines, Says Moody's
U.S. airlines will be seeing a “temporary windfall” in profits, according to a new report by Moody’s. The increased profits are said to be the result of the low oil prices that are currently prevailing globally. Meanwhile, Saudi Arabia has reiterated its stand that it’s not OPEC’s role to stabilise the price by cutting production.
The industries that are heavily reliant on oil for their business may be looking at increased revenues till the oil prices remain low. According to a press release by the Moody’s credit rating agency, there will be increased profitability and improvement in the return on invested capital (ROIC) in the U.S airline industry.
"We expect companies to hold the line on capacity rather than use their fuel cost savings to pursue market share gains," said Jonathan Root, who is a Moody's Vice President. The statement is part of a report titled "US Airlines: Cheaper Fuel, Capacity Discipline to Drive Sharp ROIC Improvement" by the agency.
The report notes that the airline companies that follow “capacity discipline” while the oil prices remain low, will ensure a better performance. Among the four major airline companies in the U.S., Southwest Airlines is said to be the one with strongest ROIC. The report also notes that the increased profitability will not last long and the companies will have to brace for an oil price rebound in 2016.
Oil prices dropped significantly after OPEC refused to cut production in its meeting in November last year. In a report by CNNMoney, Saudi Arabia’s oil minister Ali al-Naimi said on Wednesday that OPEC will not cut production to “subsidise higher cost producers.” He may have been referring to the comparatively high cost shale oil producers in the U.S.
The oil minister apparently considers a cut in oil production by Saudi Arabia or OPEC as “ceding market share” to the competitors. He, however, slammed theories about the organisation declaring “war on shale” and said that the country’s decision to not cut production was a “market reaction.”
Low oil prices are hurting Saudi Arabia’s “chief rival” Iran, according to the report. But some of the members of OPEC are also affected by the low price of the commodity. Nigeria, for example, will reportedly need oil prices at around $ 120 per barrel to balance its budget.
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