A few weeks I ago wrote about the downside of falling oil prices rather than the positive impact they should be having on consumers and certain businesses, like United Parcel Service (UPS) and FedEx (FDX). That sharp price drop is resulting in layoffs and shuttered projects as well as affecting suppliers to that industry. Well, let's turn that frown upside down and focus on an area that is poised to profit from both more cash flush consumers and falling oil prices.
That's right, more than just trucking companies consume fuel as a large part of their business activities. Another is the airlines, and last night Jim Cramer did a great job of highlighting the big gas savings that Delta (DAL) is expecting -- some $2 billion in savings from lower fuel costs. That's a pretty penny.
Are we likely to see the airlines discount seats? After the rationalization over the last few years, the odds of that are low. While airfares are not expected to rise significantly in 2014, and we could see select price drops, we have to remember that domestic airline tickets are the highest I've seen in 10 years. We'll have to watch to see if any of the airlines look to start a price war to capture share, but for now, it looks like the benefit of lower fuel prices should translate into better earnings year over year.
It's not just a cost savings story, however, and that's made clear by the forecast from the International Air Transport Association, which calls for a 7% increase in air travel this year. We also know that the World Bank and the International Monetary Fund have cut global growth expectations, but those two also ratcheted up growth prospects for the U.S.
Putting all this together tells me one of the better places to be in the airline industry is with those companies that predominantly fly domestically. That also reduces the concern over the rising U.S. dollar relative to other currencies. Remember that we have winter and spring breaks coming up, and a little more cash means more people will be traveling to Florida and other hot spots, especially as the winter chill takes hold.
The next question you're probably asking is which airlines? I have two suggestions.
One is Southwest Airlines (LUV) and the other is Virgin America (VA). Southwest is a solid operator with a record of beating Wall Street expectations, and the revenue and cost trends mean Southwest should continue to enjoy favorable tailwinds. Virgin Atlantic recently completed an initial public offering (IPO) in early November. That means it will be reporting its very first quarterly results as a public company.
I cannot stress enough how enormous the stigma associated with stumbling out of the IPO gate with a bad first quarter is -- it's a reputation killer, and that's why most newly public companies tend to sandbag their first quarters. That likelihood, along with bullish recommendations from the underwriters and the drop in oil prices, means Virgin America should have a solid debut with its earnings results. Supporting that view are favorable seat miles and passenger-load-factor data for the company during the December quarter.
When it comes to IPOs there is one item that I tend to pay careful attention to: the lock-up expiration, when insiders can unload their shares, usually to a solid profit if the deal was placed right and the company executed as expected. In Virgin America's case, the lock-up expiration date is 180 day from its Nov. 3 IPO date, or early May, and that offers ample time to profit from what should be a solid move in the shares.
Those looking for extra juice in their investments should consider Virgin America March $40 calls, which captures the company's initial public quarter results and expires well before the insider lock-up expiration date.