What happened
As noted last week, when oil zigs, airline stocks tend to zag. On Wednesday, oil prices pulled back from 14-year highs and then, sure enough, airlines got a lift. Shares of United Airlines Holdings (UAL 0.12%) led the way, up as much as 13%, while shares of American Airlines Group (AAL 0.79%), Delta Air Lines (DAL -0.20%), Southwest Airlines (LUV 1.19%), JetBlue Airways (JBLU 0.21%), and Spirit Airlines (SAVE 0.12%) all traded up at least 5%.
So what
The relationship between airlines and oil is pretty straightforward. Jet fuel accounts for as much as 30% of the operating costs of an airline, and when fuel spikes higher it inevitably hits the airline's bottom line. The crisis in Ukraine has led to oil prices soaring higher, and airlines as a result have been losing altitude of late.
Image source: Getty Images.
Wall Street soared higher on Wednesday as crude prices halted their surge, and airlines are among the beneficiaries. The industry is coming off of a difficult few years due to the pandemic, and investors had gone into 2022 hoping airlines would be able to use a robust summer tourism season to rebuild balance sheets bruised by COVID-19. Higher-than-expected fuel costs could quash those best-laid plans, and create a fresh round of uncertainty for airline stocks, so investors will be watching closely as fuel continues to move in the days to come.
Now what
Even if the lower oil prices hold, the industry's fuel costs for the first quarter and into the second quarter are almost certainly going to come in ahead of expectations made just a few months ago. That is likely to mean a round of estimate revisions in the weeks to come, which could put further pressure on the stocks.
The individual airlines have seen their stocks cut by upward of 20% since Russia's invasion of Ukraine began, and are unlikely to fully recover what they have lost as long as the conflict continues. Day-to-day volatility is to be expected, but investors should be careful attempting to bargain hunt.
Prior to the Ukraine crisis, the airline industry was facing a multiyear rebound following the pandemic. For some of the hardest-hit carriers, a recovery is unlikely until the second half of the decade. And nothing about the last few months should provide reason for hope the timetable for a recovery has accelerated.
Of this group of stocks, Southwest historically has been the safe haven. And it remains a good airline to hold for those who have a long time horizon and want exposure to an eventual turnaround. But Southwest is unlikely to be immune to the turbulence, and faces a potential showdown with its pilots in the next few years.
Prior to the pandemic, Delta was leading a transformation of airline industry pricing, and the airline remains the best-positioned so-called "legacy" international airline. But today's upswing is only as secure as the next oil trade, and investors would be well advised not to chase a one-day rally in a sector that is going to need months if not years to get back to cruising altitude.
