What happened
Shares of oil giant ExxonMobil (XOM 1.42%) jumped 4.5% through the close of trading Monday, while Delta Air Lines (DAL 1.06%) fell 4.2% and American Airlines (AAL 0.72%) declined 3.9%.
It's no huge mystery why: Oil prices went up -- so airline stocks went down.
So what
Over the course of the trading day, the price of West Texas Intermediate crude oil jumped 7.5% to $112.50 per barrel, while Brent crude oil rose 8% to close Monday at $116.60 per barrel.
According to their 2021 annual reports, fuel costs made up about 20% of Delta's expenses last year and 24% of American's -- and that was in 2021, a year when jet fuel generally cost less than $2 a gallon. In 2022, prices are exploding higher, and if things keep going in the direction they've been heading, investors can expect that fuel costs will make up an even larger percentage of operating costs at U.S. airlines this year, worsening American Airlines' losses and potentially pushing Delta Air Lines back into a loss.
US Refiner Price of Kerosene-Type Jet Fuel to End Users data by YCharts.
Now what
High fuel costs are generally good news for oil suppliers like ExxonMobil. This year, analysts polled by S&P Global Market Intelligence forecast that the oil giant could earn the most profit it's had in a decade -- nearly $8 a share. Things may go less well for airlines like Delta and America, however, as they struggle to work their way back toward profitability after two years of the coronavirus pandemic ravaged their profit statements.
Image source: Getty Images.
Already, airlines are talking about ways to mitigate the damage to their profits. As Delta Air Lines CEO Ed Bastian told the BBC last week, U.S. airlines' ticket prices may need to increase between 5% and 10% this year, in order to counteract the cost increases from rising oil prices. That works out to "probably about $25 on a ticket" for a domestic flight -- but more on longer international flights.
The danger there, of course, is that higher prices may not be enough to totally offset higher fuel costs, and may also tend to depress demand. What with travelers still often leery of flying due to Covid-19, and the potential for rising case numbers in Europe to depress demand for travel even further, the last thing these airlines needed right now was a spike in the cost of fuel.
No wonder airline investors were selling today.
