Friday, November 07, 2014

Cheaper Oil Lifts Airlines, Other U.S. Industries: Drop in Crude Prices and Fuel Bills Is Welcomed—Up to a Point

The Wall Street Journal
By Susan Carey, Joseph B. White and Betsy Morris

Nov. 7, 2014 4:07 p.m. ET


Plunging oil prices are welcome news for U.S. airlines, auto makers, and even corn farmers, but the decline if it persists also carries risks for parts of corporate America.

Crude oil prices have dropped about 25% in just over four months, hitting a three-year low of $77.19 a barrel on Tuesday on the New York Mercantile Exchange. On Friday, they nudged up to $78.65.

The plunge is causing pain in a U.S. oil patch that has expanded substantially in recent years, and figures to hurt manufacturers that supply the energy sector. But the oil slump also is shrinking fuel bills for transportation companies and for consumers, who are likely to spend at least some of the savings, giving a boost to the economy.

Perhaps the biggest direct beneficiary is the airline industry. Fuel is its No. 1 expense, costing U.S. carriers a combined $51 billion last year. Airlines for America, the industry’s leading trade group, estimates that every penny per gallon change up or down equates to $190 million in the U.S. industry’s annual fuel expense at current consumption rates.

Spot jet-fuel prices have slid about 16% from early September, which analysts said shaves about $5 billion off 2015 fuel-bill projections for the industry made before oil began its latest slide. In the near term, those savings “will go straight to the bottom line,” said Scott Kirby, president of American Airlines Group Inc., the largest U.S. carrier by traffic.

For similar reasons, express delivery companies FedEx Corp. and United Parcel Service Inc. stand to benefit, as does the trucking industry—which carries 69% of all U.S. freight tonnage. For them, lower fuel costs are helping offset higher wages stemming from a driver shortage.

The express delivery companies generally pass on fuel savings to customers, but not immediately—which means those savings can show up in their bottom lines. “Certainly if prices stay as low as they are, that would be a benefit for the fourth quarter,” UPS Chief Financial Officer Kurt Kuehn said in an interview last month.

Cheaper oil also benefits farmers, and not only because they spend less on tractor fuel. If lower gasoline prices encourage Americans to pump more into their vehicles, that could stimulate demand for ethanol, a fuel additive whose production is one of the biggest users of U.S. corn.

Low gasoline prices also help U.S. auto makers by emboldening consumers to buy more pickup trucks and sport utility vehicles, which generally yield higher profits than small cars. Sales of Detroit-brand large SUVs such as General Motors Co. ’s Chevrolet Suburban are up 16% so far this year, and sales of big pickups like Ford Motor Co. ’s F-150 rose 9.5% in October.

But an oil-price slump can cut both ways for U.S. industry.

In the case of auto makers, the government requires them to boost the average fuel economy of their U.S. car and light trucks every year to achieve 54.5 miles per gallon by 2025. Hitting that target entails selling lots of small cars, electric vehicles, and larger vehicles made with costly lightweight materials and other fuel-saving hardware.

Ford executives warned last month that consumers, lulled by low pump prices, may not opt for vehicles that hold down greenhouse-gas emissions, sometimes with more costly technology. At GM, Chevy dealers have only 59 days’ supply of Suburbans on their lots, but are sitting on more than three months’ worth of unsold Sonic and Spark subcompacts and Volt plug-in hybrids, according to Autodata Corp.

“It’s turning into a stampede away from fuel-efficiency,” says Mike Jackson, head of AutoNation Inc., the No. 1 auto dealership chain in the U.S.

A sustained plunge for oil also would hurt the U.S. chemical industry, which is investing billions of dollars in new plants to make resins and other petrochemical products derived from cheap natural gas. Some petrochemicals—notably polyethylene, used in making plastics and other materials—can be made from derivatives of either oil or natural gas. U.S. makers of polyethylene use natural-gas liquids and have had a big cost advantage over rivals in Europe and Asia that don’t have access to cheap gas and so rely on crude oil. When crude prices fall, that advantage diminishes, reducing profit margins for the U.S. chemical companies.

The blessing also is mixed for makers of pipes, valves, pumps and other equipment used in the oil sector. They benefit from lower transport costs but could also see demand slow from what has been one of the country’s most robust sectors.

Caterpillar Inc., which supplies engines to the oil and gas industry, is watching the situation closely. If oil prices drop to the $70-to-$75 range and stay there, that would “put a chill” on the oil industry, Caterpillar CEO Doug Oberhelman told analysts in late October. If prices settle in the mid-$80s, he said, “we can all live with that.”

For railroads, shipping crude from the U.S. energy boom has become one of the most lucrative and fast-growing segments of their business. Major railroads’ revenue for hauling crude jumped from $25.8 million in 2008 to $2.15 billion in 2013, according to federal data.

If oil producers begin to pull back, it will hurt some railroads more than others. BNSF Railway Co., a unit of Warren Buffett ’s Berkshire Hathaway Inc., hauls most of the oil out of the shale fields in North Dakota and Montana, and would likely feel a chill. Less affected would be Union Pacific Corp. , which hauls much less crude because its tracks are concentrated in the Southwest.

Skyrocketing oil prices allowed rail to compete more effectively against trucking, which uses more fuel. Rail analyst Anthony Hatch believes that railroads will continue to have an edge over highway transport as long as the price of oil doesn’t drop below $50 a barrel.

Even for the airline industry, cheaper oil may not be all good, analysts say, if carriers see it as an opportunity to increase capacity and then lower fares to fill empty seats, some analysts say. Hunter Keay of Wolfe Research LLC recently noted that airlines did just that during a previous oil slump in 2010. “Then oil prices went right back up again, as they tend to, and 2011 stunk,” he wrote.

Other analysts dismiss the concern, arguing that airline executives have learned financial discipline after a decade of bankruptcies and mergers. Moreover, most domestic carriers continued to raise fares even as oil prices slid in recent weeks.

Airlines coped with expensive oil in recent years by retiring their thirstiest, old airplanes and substituting new aircraft that burn less fuel. So a sustained drop in fuel prices could damp that demand, boding ill for plane makers. But Boeing Co. Chief Executive Jim McNerney indicated last month in response to a question that oil would have to fall below $70 a barrel for an extended period to trigger aircraft cancellations and deferrals by its customers.

—James R. Hagerty, Laura Stevens and Jesse Newman contributed to this article.


- Source: http://online.wsj.com

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