Russia's military move into Ukraine hit Wall Street on Thursday morning, and airlines were among the hardest hit sectors. Shares of United Airlines Holdings (UAL -0.02%), American Airlines Group (AAL -0.85%), and Spirit Airlines (SAVE 2.61%) all fell as much as 7% at the open, and shares of Delta Air Lines (DAL 0.14%), Southwest Airlines (LUV -0.55%), and JetBlue Airways (JBLU 0.88%) all fell 5% or more.
It's been a tough few years for the airline sector, as the pandemic caused travel demand to evaporate and left airlines scrambling to raise cash and ride out the storm. We've seen a gradual uptick in demand over the past year, but the industry remains in a fragile state.
The prospect of war only adds to the sector's concerns. It will take time to figure out what, if anything, the invasion means for international travel. But we do know it has caused oil prices to spike higher. Fuel expenses represent between 20% and 30% of an airline's total costs, and higher oil prices will almost certainly hit airline profit and loss statements.
Airlines have the wherewithal to survive higher oil prices, and as long as domestic demand holds up as expected during the summer vacation months the carriers should be able to pass at least some of the higher costs on to travelers.
But the market hates uncertainty, and on a day where there is an abundance of uncertainty airline stocks are not getting the benefit of the doubt.
If the pandemic has taught us anything, it is that you never really know what will come next or how big of an impact each new development will have. War, presumably, is similar, and it is all but impossible to know what the coming weeks and months will bring. There could easily be more down days than up days in the weeks to come.
But for long-term holders able to look past the near-term chaos, there is every reason to be bullish on the global travel sector. A rising global middle class should provide ample demand for travel, with passenger volumes forecast to grow 3.3% annually through 2040.
Investors willing to buy into individual carriers and hope for the best should focus on top operators like Delta and Southwest. United and American both should have ample resources to make it through difficult times ahead, but they do not have the balance sheets to compete with the top names.
For those interested in aviation but not eager to tie their dollars to any one carrier, an aircraft leasing firm like AerCap Holdings that does business with a wide range of international carriers might be a better choice.
Anyone buying in today or holding through the crisis should keep their seatbelts fastened and brace for turbulence. Given the events of this week, it appears calmer skies are still a ways off.