Shares of airlines have heavily tanked in Monday’s trading session. Shares of Delta Air Lines (DAL) lost around 13% of their value and its peer United Airlines (NASDAQ:UAL) saw its market cap decline by 15%. Years ago, I already completely eliminated my position in airline stocks. In my view, airlines are nice stocks to trade, but not suitable for long term investment despite the long term growth fundamentals. In my view, the market always finds a reason for airline share prices to be under pressure. Sometimes, capacity is a reason for shares to trade lower, other times it is viruses, geopolitical fears or rising costs that lead to lower share prices. This time obviously surging oil prices have brought share prices of airlines to their knees and in this report, I will look at why there is reason for concern and whether investors can benefit from the depressed share prices. In this report, I will have a look at what this means for Delta Air Lines and what benefits Delta Air Lines could be seeing.
Oil prices surge to multi-year highs
So, starting with stating the obvious, the reason for the decline in share prices of the airline stocks is the surge in oil prices which crossed $130 per barrel. Currently oil prices have come down a bit, but are still trading above $120 per barrel. Those are levels we have not seen since 2012. One of the main cost components for airlines are the fuel prices.
In 2019, a pre-pandemic year, fuel and related costs accounted for 20% of the total cost. However, it is more appropriate to express the fuel costs as part of the cast per available seat mile or CASM. This shows a 21% share in the fuel costs. If we were to project today’s fuel price onto that, the share would rise quite dramatically. Using a quoted jet fuel price of $3.62 by Argus Media, applying the 9.97% inflation and consider the $2.02 jet fuel price in 2019 shows that the share…