Here's a good way to invest in persistently low oil prices.
Building your wealth over a period of years means paying close attention to economic trends and using that information to forecast the future. If you can use today's data to see tomorrow's opportunities, you can guarantee your returns. One of the most important economic trends of the last two years has been the decline of oil prices. You may have seen gasoline prices rising in the last couple of months and thought this trend was over, but in fact the oil glut remains a reality. The latest data by the International Energy Agency estimated that in the second quarter, the world's supply of crude exceeded demand by 200,000 barrels a day.
Even if fuel prices rise, the decline we've seen so far has made a big difference in the profit picture for the big airlines, for whom fuel is a large portion of their supply costs. There are several interesting investment choices in this sector, but Delta Air Lines (DAL) - Get Report is the best.
Delta has posted an admirably consistent track record in a volatile business. Of the four major U.S. carriers -- Delta, United Continental Holdings, American Airlines, Southwest -- Delta has produced the most consistent financial gains. Delta serves nearly 165 million customers each year. The company and its affiliated carriers offer service to more than 330 destinations in 64 countries on six continents. The company has a market cap of almost $30 billion.
Delta reported its second-quarter 2016 results on July 14. The company's revenue fell by 2.4% year-over-year to $10.5 billion, but earnings per share rose by 3.5% to $1.47. The earnings per share figure beat analysts' estimates.
The company also reported that its passenger unit revenue fell by 4.9% during the second quarter of 2016 as foreign currency swings continued to impact unit revenues. But management has proved adept in the past at finding new efficiencies to mitigate any temporary drop in sales.
Delta's sale of extra-legroom Comfort seats as a separate fare (rather than as an upgrade to regular economy tickets) has been raising revenue growth. The company expects this to generate $300 million of revenue in the second half of 2016, helping to offset any downturn in travel plans.
The Atlanta-based company has been improving efficiency across the board, not just because of cheaper jet fuel. Non-fuel unit costs decreased 0.1% year over year in the second quarter, and the company expects to achieve a similar performance this quarter. The carrier is also increasing the number of seats it fits on each plane.
Oil mavens will be watching the release of the monthly oil-market report by the Organization of the Petroleum Exporting Countries on Aug. 10. If it continues to show downward pressure on prices, air carriers like Delta could profit handsomely.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.