Oil costs have perked up a little this year, but they’re still very low, and data suggests there won’t be any dramatic changes in the next few years. This affects every market and the total global economy, but the industry most closely tied to oil is transportation. Take a look at the four major legs of the transportation industry to see where the biggest investment opportunities lie.
Airlines
By far, airlines benefit the most from reduced oil prices. In the 21st century, fuel costs have accounted for as much as 33 percent of overall operational costs. In 2016, fuel is accounting for less than 20 percent. These massive savings have led to soaring profits.
For the most part, the bulk of these savings have not yet been passed down to customers, so most major airlines are enjoying a sudden relief to their previously constrained cash flow. This is enabling them to expand their fleets, hanging onto older, less efficient aircraft for a little longer.
They are opening more routes and catering to more niche markets. You can expect all of these trends to sustain as long as oil stays low, and experts are expecting it to take years for oil to bounce back to 2014 prices.
Not every airline is celebrating. Some, most notably Delta, negotiated fixed oil prices to protect themselves from inflating fuel prices. Even though the cost of oil is hovering around $40 a barrel right now, these airlines are still purchasing in the price range of $100 per barrel.
The missed opportunity is totaling in the billions. In short, now is the best time in decades to invest in airlines, but do a little research and make sure they aren’t locked into overpriced fuel contracts.
Trucking
While the airlines are raking it in, the trucking industry is in no tears over the situation either. Just like air travel, transportation via truck is an industry that pays heavily for fuel, usually between 20 and 30 percent of operating costs.
Another similarity between the two industries is how the lower cost of gas is enabling fleets to use older, less efficient trucks, saving tens of millions on the costs of upgrades.
But unlike airline companies, trucking companies are passing these savings down to customers, in part because trucks have to compete heavily with railroads for their biggest customers. Lower fuel is giving them the means to do that, and so many more routes have opened that the entire industry is suffering from a driver shortage.
If you are looking to invest in trucking, be a little more conservative. The oil prices are absolutely a boon for the industry, but because of different competition models, driver shortages and other complications, profit margins are not soaring to the same degree as airlines. In spite of this, profits are up, and they are expected to grow steadily while oil prices remain low.
Railroads
The railroad industry is another that pays roughly 20 percent of their entire operational overhead to the oil industry. Unfortunately for this industry, low oil prices do not net them as much profit as other members of the transportation world. This comes down to the cost of operating motor vehicles.
The bulk of the U.S. railroad industry operates in freight shipping. They’ve stayed around because the cost per mile per ton of shipping is so much lower for a train than a truck. Many customers tolerate the increased time in order to capitalize on these savings, but with oil prices so low, the savings between the two methods is dramatically reduced.
Passenger trains suffer even more. The U.S. Department of Transportation has long studied the rail market, and their conclusions suggest that passenger loads on rail will increase as oil prices go up.
Estimates suggest that a national average of $4 per gallon of gasoline would net the industry 670 million more trips a year. At $5 a gallon, the number jumps up to 1.5 billion.
This inverse of saving consumers when fuel costs increase was the bright point of rail’s long-term future. Eventually oil prices will probably reach new heights, but for the next five years, investing in rail will require a close eye and careful timing.
Waterways
The final leg of the shipping industry is via boat or ship. While the savings enjoyed by air fleets may enable them to improve their competition against boats, this will take time. In the short-term, waterways are enjoying the same improved profits and opportunities for growth as the majority of the industry.
In the long-term they may suffer from competition via air similar to that of the railroads, but it shouldn’t discourage you from looking into a few companies to jump on the profit share bandwagon.
Regards,
Ethan Warrick
Editor
Wealth Authority
