easyJet and IAG shares fall sharply as oil price fears hit FTSE 100 investors

easyJet and IAG shares have been falling since Hamas first launched attacks on Israel on 7 October. easyJet’s share price has fallen by 18.3% from 449p to 367p, while IAG’s share price has sunk by 9.6% from 156p to 141p.

For context, easyJet released a strong trading update on 12 October, while IAG reports back to investors on 27 October. But while travel demand may be making a solid post-pandemic recovery, profit margins hinge on oil prices — and oil is rising sharply in the wake of yet more geopolitical stress.

FTSE 100: Israel-Hamas War updates

UK Prime Minister Rishi Sunak is currently in Israel, and also plans to visit other countries in the region. Sunak has made clear that the UK stands with Israel and has condemned the ‘horrific act of terrorism’ made by Hamas two weeks ago.

Meanwhile, US President Biden has returned to the US after his visit was overshadowed by a blast at a Gazan hospital — with both sides blaming each other for the atrocity. Biden’s planned meetings with Palestinian and Egyptian leaders were cancelled by its host, Jordan, reducing the chances of a diplomatic solution.

Gaza remains under siege, with Israel blocking cross-border supplies of water, fuel, and electricity — however, the US and Egypt have said lorries carrying aid will start crossing from Egypt into Gaza from Friday.

Israel’s military says it has hit hundreds of sites in Gaza over the past 24 hours, targeting ‘Hamas infrastructure.’ Many analysts consider that the war could escalate into regional conflict if Israel mounts its planned ground offensive into Northern Gaza — with Iran’s foreign minister warning that ‘if the Zionist aggressions do not stop, the hands of all parties in the region are on the trigger.’

FTSE 100: oil price rises

With tensions flaring, Brent Crude rose by $3 yesterday to $92.90 per barrel, though this has since reversed. There are several immediate key factors to consider:

• Iran’s foreign minister has already called on members of the Organisation of Islamic Cooperation to impose an oil embargo on Israel — OPEC is not planning any immediate action
• Iran controls seven of the eight islands within the Strait of Hormuz. The EIA considers the Strait to be the world’s most important oil chokepoint, with the Strauss Center thinking that oil tankers carry 17 million barrels of oil, representing 20-30% of global daily consumption, through the Strait each day. Closure could see oil rise sharply
• The US-backed plan for Saudi Arabia to formally recognise the state of Israel and increase its oil production, in exchange for increased US military aid and increased political support, is now on the backburner
• The tentative nuclear deal being drawn up between the west and Iran may break down, making increased oil output from the country unlikely
• Damage to the Baltic-connector gas pipeline between Finland and Estonia was caused by ‘mechanical force.’ Russian President Putin has denied involvement, but Finnish officials cannot rule out state actor involvement.
• US crude stocks fell by about 4.4 million barrels in the week ending 13 October, according to Reuters. That was much steeper than the 300,000 barrel draw that analysts had forecast, with official US government data due later today
• Data released on Wednesday shows that the Chinese economy grew by a better-than-expected 4.9% in July-September quarter — pushing up demand for oil

IAG shares and easyJet shares: where next?

If oil remains expensive, then it has a knock-on effect for both airlines. High oil prices create higher jet fuel prices, hitting margins. But rising oil prices could also see inflation stay higher for longer, dampening consumer demand.

It’s worth noting that easyJet’s update saw the FY23 revenue leap by 58% to £8.17 billion, with profit before tax up by a whopping 352% to a record £450 million. And the company has hedged 73% of its fuel for H1, with H2 also half-hedged.

However, the company has also promised to bring back dividends while also planning to expand its fleet by hundreds of aircraft — and this could present a risk if oil remains too high for too long.

IAG saw a record H1 operating profit (before exceptional items) of €1.26 billion, with CEO Luis Gallego enthusing that ‘we are aiming to be back to pre-pandemic capacity at the end of this year.’

But if Iran declares war, then there could be more US sanctions on the country’s oil, which could remove up to 2 million barrels per day from the market — sending the hard commodity back above $100.

easyJet and IAG investors may simply be responding to this risk.

Past performance is not an indicator of future returns.