Impact of fuel price fluctuations on airline stock returns

• Published in: Applied energy Vol. 178; pp. 496 - 504
• Main Authors: Kristjanpoller, Werner D., Concha, Diego
• Format: Journal Article
• Language: English
• Published: Elsevier Ltd 15-09-2016
• Subjects: Airline stocks; CAPM extended; Oil shocks; Airline stocks; Oil shocks; CAPM extended
• ISSN: 0306-2619; 1872-9118
• DOI: 10.1016/j.apenergy.2016.06.089

•Is the first study to analyze 56 stock prices IATA and the fuel price influence.•There is a puzzle about the effects of the oil to the airline stock price.•The results show a strong positive influence of fuel price on a daily basis.•The results support the market inertia and the oil as signal of economic growth.
This paper analyzes the impact of changes in fuel price on the equity returns of airlines associated with International Air Transport Association (IATA), as listed on the stock market. While it is simple to comprehend that airline price stock returns are related to fuel price variations, it is not as simple to establish whether this relationship is direct or indirect. It could be assumed to be indirect given the high influence of fuel price on airline costs. However, when taking into account the market inertia theory and the paradigm that increases in oil price are indicators of economic growth, these relations could also be assumed to be direct.
In order to solve this puzzle, 56 airlines were studied, relating their price returns to the price variations of West Texas Intermediate crude oil and Jet Fuel by using GARCH models. The main results show a strong positive influence of fuel price fluctuation on a daily basis. These results support the market inertia theory, confirming the paradigm that increases in oil price are signals of improving economic growth.