Unplanned oil supply outages caused by geopolitical instability, military conflicts, natural disasters and technical issues are throwing airline stock markets into chaos and making it more expensive to fly.
That's the conclusion from Australian aviation experts in a new paper published in Energy Economics examining the links between unforeseen oil supply disruptions and airline stock prices.
University of South Australia researchers argue that because fuel accounts for 30% of an airline's total expenses, the industry is especially sensitive to any sudden fluctuations in the crude oil market, particularly from non-OPEC countries that are more volatile.
Major airlines such as United Airlines, Delta Airlines and American Airlines are the most affected.
UniSA aviation lecturer Dr Yifei Cai, who led the study, says the unpredictability of oil supply shocks provides compelling evidence why alternative energy sources are needed, including biofuels and hydrogen.
"Global airline operations rely heavily on stable fuel supplies, and unexpected oil supply outages make it very difficult for them to predict their costs," Dr Cai says.
Co-author, UniSA Aviation Professor Shane Zhang, says that unplanned oil supply outages have a significant impact on oil prices as they can disrupt the balance between oil supply and demand, creating shortages and driving up prices.
"Our findings suggest that airlines may need to rethink their risk management strategies and fuel hedging practices to mitigate potential financial turbulence caused by such outages," Prof Zhang says.
The oil price war between Saudi Arabia and Russia in March 2020, for example, triggered a significant shift in oil prices and was recognised as a pivotal factor in the stock market crash of 2020.
The study highlights the potential impact on investment strategies, stock market stability and long-term financial planning in the aviation sector.
The researchers claim that diversifying fuel supply sources would reduce reliance on a single region or supplier.
Investing in fuel-efficient aircraft and sustainable initiatives such as biofuels and hydrogen would also lessen dependence on traditional jet fuels and their price fluctuations.
Prof Zhang says that more than 90% of Australian oil is imported from overseas markets, for example, and it would "make sense" to grow the domestic sustainable aviation fuel industry to reduce the reliance on the overseas supply for traditional jet fuels in the long term.
Future research will investigate the impacts of unplanned oil supply outages at country levels.
Notes for editors
"Accessing the influence of unplanned oil supply outages on airline stock connectedness" is authored by researchers from Wuchang University of Technology and the University of South Australia.
DOI: 10.1016/j.eneco.2024.108145
