When oil goes down, airlines go up. And when oil goes up, airlines have to find ways to charge customers more. That’s the basic argument when investors look at airlines, oil prices, and the economy. And it’s not wrong because fuel is one of the biggest expenses that an airline has and if it drops, there’s more profit. However, economies are never simple.
Canada relies heavily on its oil production. Think about it: a big reason that Saudi Arabia was scared to begin with was because Canada has been so effective at pumping oil that it’s flooded the market. But with the price so low, many people are not making as much money. Without expendable income, no one is going to fly.
In spite of this, I believe WestJet Airlines Ltd. (TSX:WJA) is still in a decent position because the cost of flying the plane is so much less. In June, a gallon of jet fuel was $3.61. Now a gallon of jet fuel is $1.48. That’s a really big drop that all the airlines are going to profit from.
But for WestJet to really succeed with long-term low oil prices, it will need to lower its fares because the demand for airlines will drop with reduced expendable income. Fortunately, the CEO is on record saying that he is open to cutting fair costs.
At the end of the day, Canadian oil companies are going to hurt due to the drop in oil. It’s a very fine balance between whether low oil prices are better for an airline and can make the airline more profit than an increase in flying. For the short-term, this is good for WestJet. If oil continues to lag, it could turn around and bite the company.
If you own shares of WestJet, hold on to them. You’re still getting a 1.55% yield, so at least you’re getting paid. And because cash flow is so good for WestJet, that dividend really isn’t in risk. And it could even be hiked if shares prices drop.
But if you are on the sidelines and are considering starting a position, I would wait for a far more attractive point of entry and wait to see how the Canadian economy reacts to long-term depressed oil prices.
But that doesn’t mean you shouldn’t invest. There are a lot of really good buys out there right now that can make you a lot of money. And there are a lot of really good buys in the energy sector.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Jacob Donnelly has no position in any stocks mentioned.