At first, low oil prices were cheered as they ushered in the likelihood that consumers would have more cash in their pockets, which they could use to spend on a variety of goods, and in turn provide a boost to the economy. Yes, it is true overall that low oil prices are good for the economy — to a point.
If oil prices drop far enough that oil producers struggle to turn a profit, then the prices can become a huge negative, particularly for oil-based economies such as Canada’s. If oil prices fall far enough that oil companies have to cut costs, then jobs could be lost.
If layoffs rock the economy, consumer spending will be hit, and the effects could be disastrous. Once consumer spending takes a big hit, the impacts will spread from the oil sector to other sectors of the economy.
Who stands to benefit?
While many analysts are happy to provide a list of companies and sectors of the economy that will benefit from low oil prices, once oil prices are low enough for a long enough period, any potential cost savings that these companies could see will be erased by decreased demand as consumer tighten their spending.
So, as an investor, what can you do to protect your investments from this potential fallout? Are there any sectors of the economy that will be sheltered from this potential cascade of events? There is one company that I see as most likely to survive the fall out of sustained low oil prices, and that is WestJet Airlines Ltd. (TSX: WJA).
Lowered costs, lowered fares?
One of WestJet Airline’s biggest expenditures is fuel; and when oil drops so does the cost for fuel, improving the company’s margins. Now, the negative here is that WestJet Airlines is a consumer dependent stock, and if people have lost their jobs or are worried about job security, the likelihood that they will book unnecessary travel is slim.
However, there is something about WestJet Airlines that could mean demand will stay healthy even as oil prices drop. The company’s CEO recently said that he was “open to lowering fares.” Now, if the company was in the position to lower fares before oil’s price slide really took its grip, then if oil continues to slide, the company could definitely lower its fares, using improving margins as even more justification for a price decrease.
Competitive advantage of WestJet Airlines
Yes, economic hardships will impact demand for flights, but that demand won’t completely go away. Overall, there will be a significant enough demand to support healthy bottom lines for some of the airlines.
There are dozens of airlines, it is a competitive business, and with WestJet in the financial position to lower its fares, the company could attract more business from its competition, enough to overshadow a potential decline in demand stemming from consumer’s concerns over the economy.
In addition, there comes a point that prices become low enough that they attract new consumers, if you can get that trip to Hawaii finally booked for a fraction of the cost, even if you have some concerns over the economy, then you may bite the bullet and take that trip. With lowered fares, WestJet could attract business away from its competitors, and this is why I am most positive on West Jet Airlines’ future even if oil throws us back into a recession.
