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When oil markets are disrupted and prices leap, airline stocks are among the first to feel the effect. Fuel accounts for roughly a quarter of big carriers’ operating costs. But the timing, nature and geography of the current Middle East conflict pose bigger questions for investors to monitor.
In general, big airlines are in decent financial health — at least viewed from 30,000 feet. They have been bolstered by robust travel demand, particularly for premium seats, and subdued oil prices. The MSCI World’s passenger airlines sub-index has risen about two-thirds since a trough in September 2022, according to LSEG data.
Zoom in and the situation varies based on how a carrier’s flights criss-cross the globe. Without access to Russian airspace, European and most Asia-based operators are already navigating a crowded corridor south of the Black Sea and over Georgia, adding to costs and flying times.
Any additional long-term disruption to flights heading south of Iran could hit traffic between Europe and South Asia hard. Some 32 per cent of Lufthansa’s long-haul network involves Asia and the Middle East, according to Bernstein analysts. British Airways owner IAG’s exposure is lower at 17 per cent since its western European hubs favour flying to the Americas.
Cargo will be disrupted too. Increasing numbers of airlines have been selling underfloor space for more than mere suitcases, alongside dedicated freighter fleet operators. Qatar Airways and Emirates are the second and fourth largest carriers of air freight in the world in volume terms, slotting between FedEx and UPS, according to the latest annual data from the International Air Transport Association. Volumes in January between Europe and Asia increased 15 per cent year on year.
Should Doha and Dubai remain shut for any period of time, shippers will need to look for alternative hubs and carriers. Turkish Airlines’ shares fell 6 per cent on Monday, but the carrier, which is sixth by cargo volume, could be geographically well placed.
No airline is immune to higher fuel costs, should oil prices rise further. US airlines are more immediately exposed because they do not usually hedge, relying on ticket price increases. European rivals, meanwhile, typically buy protection. Even then, prolonged high prices raise the cost of that insurance too. Airlines have been schooled by past shocks; the unfolding Iran crisis will be a test of how well the lessons were learned.