Airline stocks experienced significant declines on Thursday, continuing their downward trend for the year, as escalating oil prices raised fears of diminishing profitability. Major US airlines, including American Airlines (AAL) and United Airlines (UAL), saw their shares fall by over 3%, while Delta Air Lines (DAL) dipped nearly 2%. Regional airlines, like Alaska Air Group (ALK) and Southwest Airlines (LUV), also reported drops.
The surge in jet fuel prices—over 100% in the last month—has been attributed to disruptions in energy supply due to ongoing conflict in the Middle East. With the price of US crude and Brent crude breaching $105 a barrel, jet fuel costs are notably higher. Andy Lipow, president of Lipow Oil Associates, highlighted that Asian refiners have been compelled to reduce their operational rates because of crude oil shortages, which has only intensified the supply challenges. He also mentioned that countries such as China, Korea, Thailand, and Pakistan have imposed restrictions on refined product exports.
While industry giants like Delta and United have been successful in raising fares without deter adverse effects on customer numbers, smaller carriers are struggling to maintain their financial standing. Delta stands apart from its competitors as it owns the Monroe Energy refinery in Pennsylvania, enabling it to produce jet fuel in-house and thereby cushion the financial blow from fluctuating fuel prices. In contrast, other airlines rely on third-party suppliers, which often charge high markups.
The airline industry’s outlook predicts that this quarter will witness an expense increase of approximately $400 million per airline due to the ongoing crisis in the Middle East. Despite the volatile conditions, airline executives noted a spike in demand in the initial weeks of the conflict as travellers hurriedly secured airfares. United Airlines CEO Scott Kirby remarked that the upturn in fuel prices would likely influence ticket prices swiftly.
On Wednesday, analysts at Bank of America observed that while airline transaction volumes and spending per transaction had shown growth through mid-March, there had been a marked slowdown since. This decline may be partially due to seasonal factors, as the holiday rush brought about by an earlier Easter this year subsided by the end of March. The recent spike in fuel prices may also be causing travellers to reconsider their travel plans.
Airlines are now facing fuel cost challenges amid a backdrop of previous difficulties, including severe weather that resulted in thousands of flight cancellations and staffing shortages that have exacerbated traveller frustrations.
In summary, the airline industry is grappling with multifaceted pressures from rising fuel expenses and past operational hurdles, which are set to impact costs and customer demand moving forward.
