U.S. airline stocks tumbled Monday as the oil price surge to $114 per barrel sent jet fuel spot prices above $3.40 per gallon — up 38% since the Iran conflict began on February 28 and now at the highest level since June 2022. United Airlines (UAL) fell 4.6%, Delta Air Lines (DAL) declined 3.8%, American Airlines (AAL) dropped 5.2%, Southwest Airlines (LUV) lost 3.4%, and Alaska Air Group (ALK) shed 4.1%. The U.S. Global Jets ETF (JETS) closed down 3.6%.
Fuel represents approximately 25-30% of airline operating costs, and the rapid escalation has caught carriers in an unfavorable hedging position. United Airlines disclosed in its Q1 filing that only 28% of Q2 fuel needs are hedged at $2.60 per gallon; the remaining 72% is exposed to spot market pricing. Delta's hedge coverage for Q2 stands at approximately 35% at $2.70, while Southwest — historically the most aggressive hedger — covers approximately 55% at $2.45.
Earnings Estimates Slashed
Sell-side analysts moved swiftly to cut estimates: Citi's Stephen Trent reduced his Q2 EPS estimate for United by $1.40 to $4.80 (from $6.20) and for Delta by $0.95 to $3.10 (from $4.05). Deutsche Bank's Michael Linenberg cut his full-year airline sector EPS estimate by 22% on average, warning that 'at $3.40 jet fuel, the industry generates approximately $2.1 billion less free cash flow per quarter than at $2.40 — effectively wiping out the margin improvement story.'
Capacity and Pricing Response
Airlines are expected to respond with capacity discipline — reducing seat growth for the August-October shoulder season — and fare increases. United pre-announced a $25-$40 domestic round-trip fuel surcharge effective May 15. Delta's CEO Ed Bastian said on last week's earnings call that 'we will not absorb fuel cost increases that compromise our return-on-capital objectives.' However, demand elasticity remains uncertain given the concurrent consumer confidence deterioration.