While there are many sections of the economy which are hopeful for a rebound in oil prices, companies where fuel costs make up a significant proportion of expenses are experiencing a strong growth in earnings in a low oil environment. The airline sector has been a clear beneficiary of the fall in oil prices in recent years. Oil prices are currently at decade lows which are expected to continue into 2016. The financial performance of the domestic airlines, Qantas and Virgin, will continue to benefit from lower fuel costs. We expect Qantas to deliver record profitability in 2016 and it's likely that Moody’s will follow S&P and upgrade Qantas’ credit rating to investment grade in 2016. Virgin recently announced a significant 32% uplift in second quarter earnings and is on track for a profitable full year result. In a continued low oil price environment, exposure to the airline sector is a sound investment given so much of their profitability is determined by fuel costs and we believe that Qantas and Virgin should continue to perform well on this thesis. (VIEW LINK)
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