US airline stocks mostly recovered on 17 September after falling on news of attacks on two major oil facilities in Saudi Arabia, which is expected to disrupt oil supply.

As the market opened on 16 September, US carriers saw their stocks fall about 3% on average and more than 7% in the case of American Airlines. By the evening, most had recovered by about half, except for American which remained down 6.5%.

Brent Crude spiked to $69.26 per barrel today from $60.22 at close on 13 September prior to the attacks.

While stocks reeled yesterday, airline stocks appeared to be trading up this morning – with some companies surpassing 13 September’s close.

Oil is a major expense for airlines, so they will be particularly sensitive to prolonged oil disruption.

“It really depends on how long this upward pressure on fuel prices lasts,” says Richard Aboulafia, vice president of analysis at Teal Group. “It might be over in a few days, or it might go on for months, which would of course damage airline profits, particularly for those who haven’t hedged.”

On 14 September, Aramco stated that attacks on its two oil facilities “resulted in production suspension of 5.7 million barrels of crude oil per day”, adding that it was working to restore production.

In June, the International Air Transport Association (IATA) had already revised down by almost one-fifth its 2019 global airline profit estimate to a $28 billion profit from $35.5 billion forecast in December 2018.

“For the Gulf carriers, regional instability is the last thing they need now,” adds Aboulafia. “Overcapacity and slumping demand were already concerns.”

As always geopolitical and economic challenges remain a concern to airline profitability, but could there be an impact on aircraft values also?

“The recent spike in oil prices due to Saudi oil fires is just a blip on the radar and does not pose an immediate threat to aircraft values,” says George Dimitroff, head of valuations at Cirium. “If it were sustained for a couple of months in the fourth quarter, it may affect year-end airline profitability, but as of today this does not appear to be a material threat.”

Dimitroff adds that the deferred delivery of nearly 300 Boeing 737 Max aircraft, which will likely enter the market next year, together with a rising rate of new-production aircraft once the type is re-certified could create a flood of capacity.

“This influx in capacity will come at a time where our data shows that airlines have already reduced Boeing 737NG utilisation slightly for the first time in several years - an indication that capacity needs to be trimmed down, even with Max deliveries being held back.

“It is this potential spike in availability in 2020, combined with the potential rise in jet fuel due to competing demand from low sulfur marine diesel that may be the bigger risk factor for mid-life and older generation aircraft in the next 12 months.”

Brent Crude was down to $64.17 at time of publishing.

Source: Cirium Dashboard