Rising oil prices trigger fuel cost concerns, European airline stocks fall

Investing.com - On Monday, major European airlines’ stock prices declined, with rising oil prices and fuel cost concerns putting pressure on the sector as investors assess the impact of higher jet fuel prices on earnings.

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As of 05:46 AM Eastern Time (17:46 Beijing Time), Lufthansa Group, Air France-KLM, easyJet, International Airlines Group (IAG), Wizz Air, Norwegian Air, and Ryanair saw their stock prices fall between 2.4% and 5.8%, driven by escalating Middle East geopolitical tensions pushing crude oil prices higher.

Fuel is typically one of the largest costs for airlines, accounting for about 20-30% of operating expenses, making the sector particularly sensitive to energy market fluctuations.

Morgan Stanley analysts stated that the key risks facing airlines are not only rising crude oil prices but also the widening gap between crude benchmark prices and jet fuel prices.

In a report, Morgan Stanley analysts said, “The crack spread (the price difference between crude oil/diesel and jet fuel) has recently widened significantly,” warning that despite hedging strategies, some airlines may still face higher jet fuel costs.

Airlines often use hedging strategies to lock in fuel prices and reduce volatility risk. However, Morgan Stanley noted that hedging strategies vary widely across the sector.

European low-cost carriers like easyJet and Wizz Air tend to hedge directly against jet fuel, better shielding themselves from recent price swings. In contrast, many traditional “flag carriers” hedge against Brent crude or diesel and increase jet fuel hedges closer to departure dates. If jet fuel prices remain high, this structure could pose greater risks for some airlines.

Morgan Stanley emphasized that Lufthansa Group is particularly vulnerable in a scenario of sustained fuel price increases, noting that if jet fuel prices stay high, the airline’s fuel bill could rise by over 35%, potentially eroding 88% of its projected operating profit in 2026 in the worst case.

The firm stated that this scenario is a stress test rather than its base case, adding that airlines typically offset higher fuel costs partly by raising ticket prices.

Morgan Stanley also indicated that IAG appears relatively better positioned than peers due to higher profit margins and lower exposure to jet fuel crack spread volatility.

Nevertheless, uncertainties around fuel prices and geopolitical tensions continue to weigh on investor sentiment across the European airline sector.

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