What happened
When oil prices spike higher, airline stocks typically sell off. Such was the case on Monday. Crude prices hit levels unseen since 2008, and airline stocks are badly underperforming the market on a down day for equities.
By around noon ET, shares of United Airlines Holdings (UAL -2.09%) fell as much as 9%, with shares of JetBlue Airways (JBLU -0.61%), Spirit Airlines (SAVE -0.71%), Alaska Air Group (ALK -1.93%), Delta Air Lines (DAL -1.16%), American Airlines Group (AAL -3.15%), and Southwest Airlines (LUV -1.45%) all down more than 5%.
So what
The airline business runs on jet fuel, with energy accounting for upward of 30% of operating costs. And although most airlines had forecast higher jet A prices heading into 2022, none predicted the dramatic surge higher that has followed Russia's invasion of Ukraine.
Image source: Getty Images.
The invasion has added a fresh complication to what was already a struggling industry. The pandemic severely limited demand for travel, which caused airline revenue to dry up in 2020. We've slowly seen a return in domestic demand, and the industry had hoped to use this summer's tourist season to begin to reinforce bruised balance sheets. But even if demand holds up as expected, the added fuel cost is going to eat into earnings, meaning another tough year for the industry.
The jump in oil prices could also stunt global growth, which in turn could eat into demand for air travel in the quarters to come.
These airline stocks are off between 17.7% and 23.9% since Feb. 24, the day Russia began rolling into Ukraine. (For comparison's sake, the S&P 500 is only down slightly since that date.) Investors are bracing for the worst in oil markets as Western governments consider sanctions that could limit global supplies, and airlines are following their historical trend of zigging when oil zags.
Now what
The airlines are a lot cheaper than they were a few weeks ago. But investors should think twice before concluding the stocks are suddenly bargains. The uncertainty pressuring these stocks seems unlikely to go away anytime soon, and if the geopolitical situation continues to escalate in the weeks to come, there is no reason to believe these stocks won't fall further.
Even if the situation in Europe is quickly resolved, any hope for a quick post-pandemic recovery appears to be fading. It appears it will likely take until the second half of the decade for all U.S. airlines to rebuild their balance sheets and get back to normal.
For those with a longer-term mindset, there is reason for optimism. The airlines, even after all their pandemic-related losses, remain healthy enough to withstand this crisis. And there is still reason to believe the conflict in Europe will not halt trends like the rise of the global middle class that are expected to push travel spending up 3% to 5% annually through 2040.
If you are interested in buying in, Delta remains a top pick thanks to its best-in-class management team that helped reinvent industry pricing dynamics prior to the pandemic. But Delta, like United and American, is more reliant on international travel than discounters like JetBlue and Spirit and could lag in the early days of a domestic, leisure-focused recovery.
Southwest has long been the top choice for stability and should be a safe haven to ride out the crisis. And Alaska, with a loyal customer base and a strong niche flying around the West Coast, has the ingredients to be an outperformer. But given the risks, and the extended timetable for a recovery, investors buying in would be well advised to be patient, and to not commit too much of their portfolios to the airlines.
