The surge in oil prices on the back of war in Ukraine is pointing to potential 22% downside for airline stocks, Barclays says

• Airline stocks could drop another 22% with oil prices soaring, Barclays said in a note Monday. 
• The S&P 500 Airlines Index had lost more than 15% after Russia’s invasion of Ukraine and fell further on Monday. 
• Brent crude futures briefly climbed near $140 a barrel on Monday. 

Airline stocks are at risk to fall further as oil prices spike following Russia’s invasion of Ukraine, with Barclays seeing the potential for a key industry index to drop by more than 20%. 

Oil in recent days has kicked up to prices not seen since the 2008 global financial crisis, a move that in turn has pressured stocks in the airline sector. The S&P 500 Airline Index fell 11% during Monday’s session after having lost 15% through Friday from February 25, the day after Moscow attacked Ukraine. Russia is the world’s second-largest oil producer. 

Airline stocks had been “relatively insensitive” to rising oil prices until the invasion began nearly two weeks ago, said Barclays Monday. Brent crude, the international benchmark, on Monday briefly approaching $140 a barrel, and West Texas Intermediate crude reached past $130 a barrel. Prices for fossil fuels have gained roughly 60% so far this year. 

Economists at Barclays estimate that surging energy prices will not stop the strength of the ongoing economic recovery in the US. But “our airlines analysts warn against the difficulty of airline companies matching higher fuel costs with higher fares,” wrote Maneesh S. Deshpande, head of US equity derivatives strategy at Barclays, in a research note. 

“If the 1990 oil price shock is any guide, airlines could fall an additional 20% from current levels,” he wrote, referring to the shock that stemmed from Iraq’s invasion of its neighbor Kuwait in August 1990.

From peak to bottom on June 6 through August 23, 1990, airline stocks as measured by the S&P 500 Airlines Index fell 37.6%, compared with the S&P 500’s 15.9% decline. 

“In comparison, airlines are currently 21% below their Feb-22 peak (vs the S&P -6.5%), implying a potential additional drop of 22% based on the above analysis,” said Deshpande in the note.

Russia accounts for around 8% of global oil supply. The US and its Western allies were discussing potential bans on Russian oil imports, reports said Monday, though some European leaders played down a potential embargo. Meanwhile, many traders have shunned Russian oil in the wake of the invasion.