Cruising through the volatility

As you already know (and if you don’t, it’s time to put down the video game and reenter the real world), the US is at war with Iran, sparking geopolitical turmoil and roiling energy markets across the world.

Traders are keeping a close eye on the closure of the Strait of Hormuz, the passageway for about 20% of the world’s oil. Oil costs are spiking, raising the price of fuel both on the road and in the skies: Jet fuel prices have risen by roughly $0.48 per gallon over the past week, which is equivalent to a roughly $20 per barrel oil increase.

The situation is likely about to get worse, too: According to JPMorgan, some Middle Eastern oil producing countries are days away from running out of storage space for their oil, which would cause a complete pause on production.

As we discussed yesterday, rising fuel prices result in a slew of downstream consequences, such as affecting the Fed’s next interest rate decision. But for businesses like cruise ships, airlines, and shipping companies, the domino effects are felt far more directly.

Going the extra mile

Airlines are squarely in investors’ crosshairs this week as shareholders fret about the effects of higher fuel prices on these companies’ bottom lines. Nobody has been spared the selloff pain: The US Global Jets ETF, which tracks all the major airlines, is down 12% over the last five days.

But in a note on Tuesday, Citi analysts argued that while higher fuel prices aren't exactly welcome news to any airline, some are more resilient to the shock than others.

According to Citi, airlines with low margins and high fuel expenses (as a percentage of their revenue) are the most sensitive to fuel price volatility. That makes American Airlines, JetBlue Airways, Allegiant, and Frontier Airlines the worst positioned for the moment, Citi analysts wrote. Those stocks fell 5.38%, 9.8%, 8.64%, and 5.13% today, respectively, and all but American have fallen at least 19% in the last five days.

The “winners” include Delta Air Lines and United Airlines, which have higher margins and lower fuel-expense exposure—but that hasn’t stopped investors from punishing both stocks along with the rest of their peers. Maybe once the panic-selling stops, investors will realize companies like these aren’t hurting as badly as the rest of the industry.

Heading out to sea

The same basic logic goes for cruise lines: Royal Caribbean hedges 60% of its fuel costs, which puts it in a better position than rivals Norwegian and Carnival, but all three cruise companies ended the day in the red. And while airlines generally hedge fuel costs better than cruise lines, keep in mind that they also have to deal with cancelled flights, according to JPMorgan—an estimated 11,000 flights have been cancelled across 10 countries in the Middle East over the last week.

Then there’s global shipping companies, which are also being hit hard across the board by rising fuel prices and closed waterways. Global spot rates for chartering supertankers jumped 77% this week, and are roughly 400% higher than they were at the end of December. Higher rates mean higher profits for container shipping companies like Maersk and Hapag-Lloyd, which have cut their bookings across the Middle East. Those companies are down 1.47% and 1.76% today, respectively.

Rising fuel prices might have created a travel nightmare, but while some companies are in for a rude awakening, others are sleeping soundly knowing that they’re better protected from the volatility.—LB