The weekend attack on Saudi Arabia’s critically important Abqaiq oil refining plant and storage facility sent oil prices higher on global markets while big oil users like the airlines and the big shipping and cruise lines saw their stocks fall in anticipation of higher pump prices and negative impact on consumer spending.
Both West Texas Intermediate and Brent Crude, the two most widely traded grades of oil, rose more that 13% in trading on world markets Monday. WTI closed at $62.36, up 13.69% or $7.51 a barrel. Brent closed at $68.67, up 14.03% or $8.45 a barrel. Those are the highest closing prices since May. The highest prices in the last 12 months came in the first week of October 2018, when WTI topped $75 a barrel. But throughout the summer oil prices hovered in the $55 – $60 range per barrel.
During early trading on Monday airlines were hit hard, as they nearly always are whenever events impacting the flow of oil from the Middle East or the United States occur. U.S. carriers’ stocks started off down around 10% on Monday. But, most of them staged a bit of a comeback in the afternoon to finish off down only around 3% or less on the day. One U.S. airline – Southwest – even managed to finish in positive territory, barely, at $55.81 a share, up two cents on the session. Shares of major international carriers mostly followed a similar trading path on Monday, rebounding in the afternoon to close mostly in the -3% range.
One carrier, however, suffered far more than most other big carriers around the globe on Monday, and it happens to be the world’s largest; American Airlines.
American has been a Wall Street laggard for over a year now because of its relatively high debt and rising costs, sloppy operations and poor on-time performance, sagging customer satisfaction reports, difficulties with its labor groups, the global grounding of Boeing 737 MAX planes of which it operated 24 at the time the grounding, and what many investors complain has become chronic financial underperformance. And it got hammered worse on Monday than its rivals.
American’s shares closed at $27.77, down 7.68% on Monday. That’s on top of the 13.8% in value those shares lost in August as the carrier was being besieged by flight delays and cancellations it blamed on job actions by its mechanics that a Federal Judge in Fort Worth eventually uled were illegal. The carrier reported a modest net profit margin for the quarter ended June 20 of just less than 5%. In historical terms, that’s pretty good for an airline, but in recent years airlines have stabilized their performances and have begun reported significant and steady profits. American’s closest rival, Delta, which now in some respects is larger than American, earned almost a 17% net margin in the same period.
American’s relatively high level of debt that many analysts and investors have been complaining about since at least early 2018 has left it more vulnerable to oil price spikes than any U.S. carrier and more vulnerable to most other airlines around the world. That’s because its debt load gives it has less flexibility to respond in the marketplace to tougher business conditions by lowering fares or taking other steps to stimulate travel demand. Historically oil spikes, if prolonged, have tended to trigger significant slowdowns in air travel demand and consumer spending on discretionary items like travel.
American’s current level of debt and capitalized lease obligations of around $35 billion are up sharply from $25 billion two years ago and are more than double its $16.8 in debt six years ago at the end of 2013. Some of that big spending went toward lots of new planes to replace the carrier’s aging fleet – spending that in theory will reap rewards over the long term in the form of reduced fuel consumption by those new planes. But lots of that borrowing – plus more than $4 billion in corporate cash – went toward expensive share buy-back programs, new airport facilities at some of its hubs and the company’s gleaming new headquarters building in Fort Worth, across the highway from its former, less impressive digs.
Between that debt balance, the company’s long-standing disdain for fuel hedging designed to soften the blow of oil price spikes, and its status of the world’s biggest consumer of jet fuel, American not only is more vulnerable than its competitors to oil price spikes, but also to an economic slowdown. Some _ though not yet a majority of – economic analysts say such a slowdown is possible in this country within the next 12 months.
Historically smaller carriers are more vulnerable to oil price spikes simply because they have fewer financial resources. But on Monday investors treated small-ish U.S. discount carriers Spirit and Allegiant airlines more kindly than most of their larger competitors. Spirit’s shares lost just less than 1% of their value, while Allegiant’s shares declined just 0.13%. JetBlue, a mid-size airline, saw its shares lose just over 3%, by United shared dropped 2.8% in value and Delta’s 1.57%.
Where those carriers’ share prices will go from here depends largely on what happens next in this new chapter of geopolitical chess launched over the weekend when what U.S. and Saudi officials are now saying was an Iranian-mounted or Iranian-aided attack on Saudi Arabia’s most important oil infrastructure. The attacks knocked out an estimated 50% of Saudi Arabia’s oil production capacity, or about 5.7 million barrels of oil per day. Officials there quickly declared that they expect to get about a third of that idled capacity, or about 2 million barrel per day, back up and running “soon.” And President Donald Trump quickly signaled that the U.S. is prepared to make some of its strategic oil reserves available on the market, if needed, to smooth out any global supply or market imbalance issues.
But Ben Brockwell, an analyst at the Oil Price Information Service in Houston says hopes that so much of Saudi Arabia’s production capacity could be back online by Tuesday, and that nearly all of it can be restarted in a short time frame seem unrealistic. “This is going to be a disruptive event for oil and supply prices for a longer period than one might expect,” he said. “Facilities have been badly damaged.”
He said it’s likely that even if there are no other events in the Middle East that could impact oil prices – like a retaliatory strike by Saudi and/or U.S. forces, or other aggressive actions against Iran – he expects this one event over the weekend to impact oil prices through the end of this year.
And the possibility for more events in the Middle East that could impact oil prices is high, he added. Escalation of hostilities could easily take the price to around $80 a barrel and outright war could push it to $100 a barrel or higher, though full-scale war isn’t as likely.
“This one event won’t have a major impact on our economic growth,” Brockwell said. “But it has re-inserted geopolitical events back into the oil pricing equation, where it really hasn’t been a factor for some time. They idea that oil markets are stable now and we don’t have to worry anymore about oil prices going high – I think that’s been removed from the equation for a little while.”