How does the current decline in airline stocks compare to historical periods?

Investing.com - Major U.S. airlines are approaching a critical turning point as the industry faces a sudden surge in energy costs that could disrupt profitability for the year. According to a research report from UBS, several airlines are expected to release mid-quarter updates this week, with analysts generally pausing their guidance for fiscal 2026.

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Strong demand and rising revenue per available seat mile (RASM) provided a tailwind early this quarter, but “significant uncertainty” around fuel prices for the remainder of the year has shifted focus to a defensive stance.

Q1 “Buffer”

Despite recent volatility, the direct impact on Q1 earnings may be less severe than the appearance of soaring fuel prices suggests. UBS analysts note that airlines typically maintain a two-week fuel inventory, meaning the price spike in March may only affect about 15 days of the current reporting period.

The report states, “This should buffer the drag on Q1 EPS,” indicating that most airlines will still manage to meet their previous guidance midpoints.

The sector’s performance is expected to diverge. United Airlines (NASDAQ: UAL) is seen as having upside potential due to the lack of new flight attendant contracts and higher RASM, which could offset fuel pressures.

In contrast, American Airlines (NYSE: AAL) faces greater sensitivity to fuel costs, potentially pushing its earnings toward the lower end of guidance. Meanwhile, Delta Air Lines (NYSE: DAL) and Alaska Air Group (NYSE: ALK) are expected to remain relatively stable, close to their original targets.

A Litmus Test for Price Pass-Through

A key question for 2026 is how much higher operating costs can be passed on to consumers. The market is closely watching airline comments on fare increases, as the post-pandemic travel boom matures into a more cost-sensitive environment.

UBS states that demand has remained strong this quarter, but maintaining “pricing power” amid triple-digit oil prices remains a major risk for the sector’s recovery.

Institutional investors believe the recent decline in airline stocks raises questions about whether the sector is approaching a cyclical bottom. Historically, during sustained energy inflation, airline stocks tend to struggle unless accompanied by positive capacity constraints.

As management teams retreat from long-term forecasts to navigate the “macro fog,” the sector’s performance may still be closely tied to daily fluctuations in Brent crude oil benchmarks.

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