Plummeting crude oil prices have resulted in a notable drop in the jet fuel costs of US Airlines, which has enabled them to move out of the heavy losses that they once suffered. Most of the airlines’ EBITDA grew by roughly 30% on an average due to these notable fuel cost savings. Apart from expanding the profitability, this has also significantly improved the cash flows of these large airlines. In order to utilize this excess cash flow, the US airlines have spent a considerable amount to revamp their existing fleet of aircraft, by purchasing newer, larger, and more fuel-efficient aircraft. For instance, the three largest US airlines — American Airlines,
Due to the persistently low fuel costs in the first quarter of 2016, these network carriers aim to further improve their aircraft fleet in 2016 and spend a notable portion of their EBITDA to finance their capital spending. The top 3 US airlines target to spend approximately 35% on average of their EBITDA to re-fleet their aircraft in 2016 and expect to receive deliveries of about 150 aircraft in total during the year.
Even though this trend will work in the favor of the US Airline industry in the short term, it will not be sustainable for these airlines to maintain such a high capital budget once the commodity prices recover. Hence, over time when crude oil prices rebound and jet fuel costs increase, the EBITDA of these airlines is likely to come down. Consequently, these airlines will be forced to cut down their capital spending. We present our forecast for the EBITDA and Capital Spending of these airlines over the
Overall, we believe that the lower fuel costs have allowed US Airlines to create a cost-efficient fleet of aircraft, which will help them to compete among themselves and preserve their margins even after the oil markets rebound eventually.
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