What happened
On Tuesday, crude oil hit a price it hasn't reached since 2014, and airlines, one of the biggest consumers of fuel, lost altitude as a result. Shares of Delta Air Lines (DAL 0.08%), United Airlines Holdings (UAL -1.25%), American Airlines Group (AAL -1.77%), Southwest Airlines (LUV -0.84%), and JetBlue Airways (JBLU 1.05%) led the way, each down more than 5% at midday.
So what
Russia's attack on Ukraine continues to weigh heavily on investors, sending markets down more than 1.5% on Tuesday afternoon. And airlines are getting hit harder than the averages.
Image source: Getty Images.
Airline stocks tend to underperform in times of geopolitical crisis because of the global nature of their businesses. Their reliance on crude also makes them vulnerable in times of uncertainty. Fuel is responsible for 20% to 30% of an airline's total expense, and the stocks were hit hard on Tuesday after West Texas Intermediate crude jumped 10% to $105 per barrel, its highest price since 2014.
Sustained oil prices at this level are clearly going to eat into quarterly earnings, and could have airlines rethinking summer expansion plans. The silver lining, if there is one, is that airlines are also facing a pilot shortage that figured to crimp growth anyway, and the lack of capacity could support pricing power and allow for the industry to pass at least some of the higher costs on to consumers.
But for investors who saw airlines scramble to avoid collapse during the pandemic and had hoped a rebound in 2022 would help the industry to rebuild balance sheets, the fresh uncertainty is an unwelcomed development.
The nature of the conflict could also push back a hoped-for recovery in international travel, which tends to be more lucrative for the likes of Delta, United, and American. Although no airline was overly reliant on the Russian market for revenue, Delta and American both have Russian partners. And the conflict is likely to diminish demand to other parts of Europe as well.
Now what
Until the current geopolitical situation shows signs it is moving toward resolution, it is hard to imagine airline stocks breaking out and soaring higher. Even after it is resolved, the industry still has a tough path ahead.
During the pandemic, there was talk it could take until the second half of the decade before travel patterns completely normalize. As domestic demand returned early last year thanks to vaccines, there was some hope among investors that this timetable would be accelerated. But a combination of new variants and now war in Europe has dampened those hopes. The airlines, though healthy enough to survive, will require time to rebuild their cash reserves and get back to business as usual.
There is reason for long-term optimism about global growth in travel demand, and the U.S. industry has arguably never been as well run as it is today. There just isn't much of an argument to rush into the stocks today.
For those with a long-enough time horizon who can ride through turbulence without bailing, Delta and Southwest are two best-of-breed carriers that look attractively priced and that should outperform over time. Just be prepared to spend some time waiting for takeoff.
