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Does cheaper oil make airlines a good buy?

January 19, 2015

There has been a rash of articles recently saying that because the oil price has fallen, this is bullish for airlines.

There are two ways of looking at this.

A) you could expect to see oil falling as good for airlines, having an immediate effect each time the oil price moves
B) you could expect a longer lag, that once the oil price has fallen by a sizeable amount, that leads to positive performance

I am used to thinking the first way because I take a technical approach, whereas a fundamental analyst might see things the second way.

Let’s examine the evidence, showing the historical relationship between the S&P 500 Airlines Index and the oil price

S&P 500 Airlines Index and oil


The chart is split into periods, picking out a turn in either the sector index or oil.

  • Whilst the end of this sector rally has coincided with a falling oil price, much of the rally since late 2012 (blue arrow) occurred with a rising oil price
  • During the period of early 2007 to mid 2008, the oil price rose but the airline index first fell but then rallied
  • The sector fell along with a falling oil price in 2001 due to the terrorism threat but also the effect that had on broader stock market sentiment
  • The sector fell with oil in 2008 during the market crash. Again the market environment was much more important than the price of oil


There has not been a consistent correlation between the oil price and the S&P 500 Airlines Index over the last 15 years. This is the case whether you expect the stocks to react immediately (technical method) or with a delay (fundamental method).

What about if the effect of the broad market is stripped out? Next I show the relative strength of the sector against the S&P 500 Index.

S&P 500 Airlines Index versus S&P 500 Index and oil


  • At the start of 2002, airlines had the fundamental benefit of cheap oil but they underperformed right up to the end of 2007
  • At the start of 2008, airlines started to outperform, even though oil continued to go higher
  • Within the longer period of underperformance, there are periods of inconsistency: from mid 2005 to early 2007, oil rallied then fell and the relative strength of airline stocks rallied then fell
  • Airline stocks have outperformed since late 2012 but only since summer 2014 has this been in a period when the oil price was falling


Whilst at times a low oil price leads to a period of positive performance, the long period from early 2002 (when the oil price made a low) to 2008 does not support this argument.

Other factors such as what is happening with other sectors, broad market sentiment and market shocks are more important.


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