Sell oil: buy airlines

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“But a price turnaround to the downside could be almost as rapid as the recent rise if sentiment shifts substantially, in an increasingly fragile market. Even a USD20 fall in global oil prices would cause airline stocks to surge.” And “the potential exists for a quick upside…watching the inverse correlation between airline share and oil price fluctuations recently.”

When yesterday’s Europe Airline Daily ventured those comments, it would have taken the bravest of gamblers to bet that six of America’s largest airlines’ stocks could rise between 25-41% later the same day, as oil prices fell a modest four dollars further (and the US economy continued to emit contradictory noises). For, “investing” in US airline stocks these days is a gamble that shows at the finer end of the bookmaker’s betting risk scale.

But the over-reaction, which saw for example United Airlines’ share price rise 41.5% on the day, appears to reinforce the prospect of an exaggerated inverse relationship between oil and airline share prices. Meanwhile, Lufthansa will not have been disappointed to see its investment in JetBlue worth 21% more today than yesterday.

USA carriers’ share price one day change on 16-Jul-08

Source: Centre for Asia Pacific Aviation & Yahoo Finance

The following graph shows how the five major US network airlines’ shares have fluctuated over the past month. The dotted line – the inverse trend – shows oil price rises and falls. But, while the share scale on the left runs across a spectrum of some 60% in value, from 20% down during this short period to 40% on the positive, the oil price scale on the right only operates in a very small range, from USD132 to USD145.

US carriers’ share price one day change vs crude oil price: 19-Jul-08 to 16-Jul-08

Source: Centre for Asia Pacific Aviation, Energy Information Administration of U.S.Government & Yahoo Finance

The disparity in proportionality (even bearing in mind that other economic factors than fuel are in play), suggests a situation of near-hysteria among the investment community. While the US Air Transport Association rails before Congress about speculators in the oil market, back at home the speculators are having a field day with their own members’ prices.

Whether this suggests that an oil price below USD100 will spark a revitalisation of the airline (and wider) share market is not the main point.

Where America’s finest are subject to such wild fluctuations, the prospect of their being able to set long term plans in place (try buying aircraft), is minimal. Yet that is what they need to do in the very near future.

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