http://www.businessweek.com/news/2013-08-27/united-paces-airlines-retreat-as-syria-tension-sends-oil-higher

Bloomberg News

United Paces Airline Slump as Oil Rises on Syria Tensions

August 27, 2013

United Paces Airlines’ Retreat as Syria Tension Sends Oil Higher

United Continental Holdings Inc., the world’s largest carrier, slid as much as 8.4 percent, the most in intraday trading since July 2012. Photographer: Patrick T. Fallon/Bloomberg

United Continental Holdings Inc. (UAL:US) tumbled 7.2 percent to pace a slide by U.S. airlines as crude prices climbed on speculation that tensions in Syria will disrupt oil supplies.

“If oil goes up, the price of jet fuel goes up immediately after,” Robert McAdoo, an Imperial Capital LLC analyst, said today in a telephone interview. “People are worried that in the short run, airlines’ earnings could be hurt.”

The Bloomberg U.S. Airlines Index fell 5.1 percent at 4:15 p.m. in New York to the lowest level since June 24. United, the world’s largest carrier, had the biggest one-day drop since Aug. 13. All 10 airlines in the gauge declined.

Jet fuel is refined from crude oil and is typically the largest expense for U.S. airlines. West Texas Intermediate crude jumped almost 3 percent on concern that the U.S. is nearing a military strike on Syria after accusing President Bashar al-Assad’s government of using chemical weapons on civilians.

Foreign Minister Walid al-Muallem said today that Syria’s defenses will “surprise” the world if the U.S. and its allies take military action. Western powers told the Syrian opposition to expect a strike against Assad’s forces within days, Reuters reported, citing sources who attended a meeting.

WTI for October delivery climbed $3.09, or 2.9 percent, to $109.01 a barrel on the New York Mercantile Exchange. It was the highest settlement since Feb. 24, 2012, and the largest percentage gain since May 2.

Output Capacity

Syria borders Iraq and is near Iran, countries that together hold almost a fifth of the Organization of Petroleum Exporting Countries’s output capacity, according to Bloomberg estimates. Syria itself produced just 164,000 barrels a day of the 28.3 million pumped in the Middle East last year, according to BP Plc (BP/)’s Statistical Review of World Energy.

“Geopolitical instability in the Middle East is always good for crude oil prices, which is never good for airline stocks, who derive approximately a third of their operating expenses from fuel costs,” Michael Razewski, a principal at Douglas C. Lane & Associates in New York, said in an interview. The firm has $3.2 billion under management including shares of Delta Airlines Inc., United and Southwest Airlines Co. (LUV:US)

In the second quarter, lower fuel expenses helped airlines such as Delta and US Airways Group Inc. post earnings that exceeded analysts’ estimates. Jet fuel slipped 6.5 percent during the three months to June 28.

To contact the reporter on this story: Leslie Picker in New York at lpicker2@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net


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