Oil Price Volatility and Airlines’ Stock Returns: Evidence From the Global Aviation Industry

Abstract

The paper explores the long versus short-term attributes of the airline industry exposure to oil price risk in a macroeconomic framework that emphasizes the interconnections between various risk factors, which is the main contribution to the research in the field. A panel ARDL model and PMG estimator have been applied on monthly data between 2007 and 2020 to investigate the long-term equilibrium relationship between airline companies’ stock prices, oil price risk, financial market volatility, currency risk, inflation, and maturity risk. The negative impact of oil price risk on airlines’ stock prices is significant, robust, and pervasive, and is coupled with a concerning exposure to the US dollar currency risk. As another contribution, the paper analyses the prospects and challenges of the airline industry in dealing with oil price risk in the post-pandemic world. The results point towards the need of the airline industry to rethink its strategic decisions in the more uncertain and unpredictable post-pandemic world, requiring a more comprehensive approach of the complex and dynamic network of risk exposures and a reconsideration of hedging policies.

Time Series Analysis of Long-Term Stock Performance of Airlines: The Case of Turkish Airlines

“…This theory is supported by the fundamental idea that oil functions as a crucial input for various industries. Consequently, any upsurge in oil prices is projected to elevate operational expenses, leading to a decrease in forthcoming cash flows, profits, and dividends, affecting stock prices and returns (Horobet et al, 2022).…”

“…Based on these results, the research provided recommendations and proposals for investors and stakeholders in the financial market. Horobet et al (2022) looked into the impact of oil price volatility on airline stock returns. The study used panel ARDL models and PMG estimators to examine the risks associated with oil prices and aviation stock prices having a long-term equilibrium relationship, financial market volatility, exchange rates, inflation, and maturity risk from 2007 to 2020.…”

“…The literature presents various methodologies, from the Engle-Granger cointegration method to machine learning methods like LSTM and GRU. Notably, only one study by Horobet et al (2022) mentioned using a panel ARDL model, suggesting that while the ARDL approach is common, it is less frequently applied to airline stock performance.…”

Analyzing the Impact of Crude Oil Price Changes on Airlines' Stock Prices in the Indian Aviation Industry

“…The analysis revealed that the airline industry experienced a decrease in stock price returns due to changes in crude oil prices between 2008-2009 (Shaeri et al, 2016) research shows that the price of crude oil has a greater impact on the stock price of airlines compared to other industries. According to (Yashodha et al, 2017), The drop in crude oil prices had a detrimental effect on Cathay Pacific Airways Limited and China Airlines (Kristjanpoller & Concha, 2016) also discovered a positive impact on 56 airline companies (Horobeț et al, 2022) reported that the crude oil price had an effect on five US airlines. (Xiao & Yoon, 2019) I studied the influence of three different crude oil prices on the stock prices of four airlines using VAR-GARCH.…”

Principles and examples of drag reduction in civil airliners

“…Technologies that improve fuel efficiency are needed in this stagnant market to reduce airline operation costs and accelerate the industry's recovery. Moreover, as global warming continues to intensify, IATA aimed for a 50% reduction of net carbon emissions in the industry by 2050, revealing the importance and urgency of increasing fuel efficiency [9]. Based on research, around 85% of drag in today's commercial aircraft comes from skin friction and induced drag, highlighting the importance of further investigation in both fields [10].…”