Airlines Disad Negative

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Forbes 12 [june 6, Airline Stocks Flying High After Big Correction In Oil Prices,]

Oil prices have suffered a substantial correction over the last couple of months, with US benchmark WTI even falling more than 20% in May. With crude trading in the mid-eighties, falling prices should bring some relief to consumers, particularly at the pump, but they also provide an investing opportunity: airlines, which last year consumed 36% of their revenues in jet fuel. It’s been a wild ride for crude traders in 2011, with benchmark WTI oil futures topping $110 per barrel in February, and now tumbling all the way to $85.43, as of Wednesday’s close. While prices remain relatively high, in part due to underlying geopolitical concerns according to OPEC, the substantial drop should prove bullish for the economy and certain stocks. In particular, airline stocks. A report by S&P Capital IQ released on Wednesday suggests shares in airlines will continue to benefit as fuel prices retreat. In 2011, the U.S. airline industry consumed 16.4 billion gallons of jet fuel, costing them approximately $47 billion. Indeed, this is 36% of the industry’s 2011 revenues, “leaving little room for profitability,” S&P’s Jim Corridore argued. But, as the tide has turned, so has the outlook for airlines. Oil prices could fall even further, as I explained in a piece on the crude oil market, with WTI possibly hitting $75 by the end of the month. The sustained decline would be good for the industry “so long as the drop is not due to such a severe economic downturn that passengers stop flying.”

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