Airline Stocks Highly Vulnerable To Rising Oil Prices

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Includes: AAL, ALK, DAL, HA, JBLU, JETS, SAVE, SKYW, UAL
by: Daryl Montgomery

Summary

Most airline companies hedged their jet fuel costs until recently.

Airline companies have mostly dropped or minimized their hedges on fuel.

This is likely to prove a costly mistake and can seriously damage profits if oil keeps rising.

Airlines are the most vulnerable they have been in years to rising oil prices. As oil prices rose in the first decade of the 2000's, they increasingly hedged jet fuel costs, which were their largest single expense later in the decade. While the hedges on the rising price of oil saved the airlines billions in overall on fuel costs when the price of oil was going up, they started producing ugly losses when the price of oil started falling in mid-2014. The airlines reacted by either minimizing hedges on the price of jet fuel or dropping them altogether. It's a decision that they are likely to regret.

American Airlines completely dropped hedging in 2014 and this proved to be a wise decision since it allowed the company to get the full benefit from falling oil prices. Delta and United Continental Holdings kept their hedges in place and lost $2.3 billion and $960 million respectively on them in 2015. None of the three are hedging oil prices currently, although they and all the other airlines should have put on massive hedges at the $26 WTI crude oil price low in February (oil is now around $50 per barrel).

The behavior of airline stocks so far in 2016 has divided into two distinct categories. The worst performing stocks in the group - Alaska Air Group (NYSE:ALK), American Airlines (NASDAQ:AAL) Delta Air Lines (NYSE:DAL), JetBlue Airways (NASDAQ:JBLU), and UAL Corp (NYSE:UAL) have been trading in the opposite direction to the price of oil since mid-April. The two charts below show their price behavior. The first compares them to the XAL, the NYSE Arca Airline Index, which is currently essentially flat on the year. The worst performing airline stocks are down approximately 20% to 25%, however. The second chart compares their price movements to the price of WTI crude oil.

In the charts below, the yellow line is Delta Air Lines, the blue line is Alaska Air Group, the orange line is JetBlue Airways, the red line is UAL Corp and the bronze line is American Airlines. In the first chart, the black line is XAL, the airline index and in the second chart, the black line is WTI crude oil.

Worst Performing Airline Stocks Versus XAL 2016

Worst Performing Airline Stocks Versus Crude Oil 2016

Contrast the worst performing airline stocks with the three best ones. Notice that they seem to be trading with the price of crude oil, not opposite to it. The relationship is less exact, though. The black line is WTI crude oil and the blue line is Hawaiian Holdings (NASDAQ:HA), the red line Spirit Airlines (NASDAQ:SAVE) and the bronze line is Skywest (NASDAQ:SKYW).

Best Performing Airlines Stocks Versus Crude Oil 2016

Since airline companies have left their fuel costs mostly unhedged, and it is their second highest cost (after labor) currently, oil prices need to be watched closely by investors in this industry. If you think oil prices are going up, companies that are hedged will likely outperform their peers considerably. The opposite is the case, if oil prices return to their lows. The best performing stocks should be bought in this group (currently HA, SAVE, and SKYW), but these can change over time, so this needs to be monitored as well. Investors who just want to take a position in a group of airline stocks have no pure play airline ETF, but can use JETS to do so, even though this ETF also includes aircraft manufacturers, and airport and terminal services companies.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.