Airline Shares Fluctuating with the Short-Term Price of Oil

On Wednesday morning, airline stocks were dragging down industrial indices. The reason is investors forgot short-term oil-price swings do not matter. The change in stock values seems to belie the belief that markets are efficient.

Shares of Delta Air Lines (DAL), American Airlines (ticker: AAL), Southwest Airlines (AAL), Alaska Air Group (ALK) and United Airlines (UAL) were all down more than 1% near midday. However, Wall Street did not publish a splashy research note.

The sector is currently down because of Tuesday gains. The gains were fueled by rough benchmark prices that dropped more than 3%. Jet fuel is a huge expense, and the price tightly correlates with oil prices.

But the next day, oil was back up, so airline shares were moving in another direction.

Change in Stock Values Belie the Idea about Markets’ Efficiency?

Yet, over two days, airline shares have dropped about 1.3% on average. Oil prices are also down over two days by about 1.5%. The lockstep move is counter-intuitive. When costs are dropping, stocks should be rising.

Investors can not criticize the overall market for the current situation. The S&P 500 is off only 0.1% over the same span. Over long periods, airline stocks don’t tightly correlate with energy prices. This might be surprising for investors. The rate of change in energy prices is more important to airline stocks than the absolute level of energy prices.

The two-day reaction in airline shares seems to be an overreaction. The market requires efficiency. However, traders exist to arbitrage value differences.

At the margin, lower oil prices help airlines. Lower costs mean airlines can drop fares, which boosts demand for air travel. Moreover, when oil prices are low U.S. consumers can spend less money on gasoline. That frees up more money to travel.

Share prices move every day. Yet, it is a curious move. Moreover, there are a lot of factors to account for any short-term stock-price fluctuation. But it is always a good idea to try to figure out why stocks are moving.