Morgan Stanley: Low Fuel Prices Help Offset Airlines’ Headwinds

Jet fuel has fallen around 15 percent since early July, which has offset potential headwinds for airlines including lukewarm passenger revenue per available seat mile (PRASM), a recent Morgan Stanley report says.

Rajeev Lalwani, an analyst with the wealth management firm, notes that “risk-reward is skewed to the upside, and we remain positive on airlines fundamentally.” His reasons for the positive outlook include the “balancing of supply-demand over time, substantial capital returns, and attractive valuation multiples.”

Commenting on fuel prices, Frank Holmes notes that Brent crude oil’s dip below $50 has been a “big win for airlines.”

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A basis point, or bp, is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001).

Valuation multiples are a quick way to value a company and are useful in comparing similar companies (comparable company analysis). They attempt to capture many of a firm’s operating and financial characteristics in a single number that can be multiplied by some financial metric to yield an enterprise or equity value. Multiples are expressed as a ratio of capital investment to a financial metric attributable to providers of that capital.

Passenger revenue per available seat mile (PRASM) is a measure of passenger “unit revenue.” It is calculated by dividing passenger revenue by available seat miles. Typically the measure is presented in terms of cents per mile.