Airline stocks hit all-time highs as oil traded above $100/barrel

BCrude oil rents hovered around $114 a barrel on Wednesday, its highest level since June 2014, as the conflict in Ukraine escalated and sweeping economic sanctions were imposed on Russia, the world’s third-largest oil producer.

Due to geopolitical uncertainty, equities sold off significantly, with the MSCI World Index falling more than 2.6% in February.

Global airline stocks, however, ended the month slightly ahead with a gain of around 0.6%, a possible sign that investors were sensing a return to post-pandemic normalcy before the Kremlin started shaking. his sword.

But now airlines are facing a new challenge with higher fuel costs, or so the market seems to believe. Even though demand for commercial air travel has grown well in the first two months of 2022, with the number of global flights increasing by 9.3% and the number of passengers based in the United States increasing by 20%, a stock index airlines fell slightly by 0.4%.

This has created what I think is an attractive buying opportunity.

Efficient operation in a high fuel cost environment

The price of crude has risen a lot so far this year, and fuel is one of the biggest expenses for airlines. That alone may seem like a major headwind. But rising fuel prices haven’t necessarily stopped stocks from rising.

Take a look below. Oil prices were very high from 2011 to mid-2014, yet global airline stocks hit new all-time highs.Airline stocks hit all-time highs as oil traded above $100/barrel

They continued to soar over the next few years, not just because the oil market crashed, but because carriers became lighter and more efficient. They learned to pack more people on each flight, they practiced the discipline of capacity by getting rid of unprofitable routes, and they started charging for benefits and services that were previously included in the price of a ticket.

In 2012, these ancillary fees generated less than $40 billion for global carriers, and in 2019 they were responsible for bringing in nearly $110 billion, according to IdeaWorks. Even though fees have fallen in dollar terms due to the pandemic, they continue to represent a larger share of global airline revenue, which should help companies offset the rising cost of fuel.Airline stocks hit all-time highs as oil traded above $100/barrel

The discipline of ability is also essential

Furthermore, some analysts have shown that the performance of airline stocks is not determined by oil prices or even earnings, but by perceived pricing power. In 2016, Hunter Keay of Wolfe Research told CNBC that in some environments, high fuel costs might actually be good for carriers because they encourage capacity discipline, making the group more attractive to Investors.

“Discipline of abilities and fundamental behaviors are far more important than the amount of money [carriers] win,” Keay explains. “It has nothing to do with estimates; it has nothing to do with margins; it has nothing to do with the money or cash flow you earn, even. That’s how you do it. Is it sustainable? High oil prices create this dynamic.

To be sure, airlines face challenges that did not exist at the time Keay made the comments, including the ongoing pandemic and Russia’s aggression against its neighbor. And yet its fundamental point remains intact.

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The MSCI World Index is a global global equity index that represents the performance of large and mid capitalization stocks in 23 developed countries. It covers approximately 85% of the float-adjusted market capitalization of each country. The NYSE Arca Global Airline Index is a modified equal dollar weighted index designed to measure the performance of highly capitalized and liquid international airlines.

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