It's not a happy day on the markets today as we start the first full week of the new year and decade. The S&P/ASX 200 (INDEXASX: XJO) is down around 0.52% today (at the time of writing) and most shares on the market are trending lower.
But a standout loser today is the Qantas Airways Limited (ASX: QAN) share price. QAN shares closed last week at $7.19, but today have opened at $7.01 (a drop of 2.5%). The pain hasn't stopped there and Qantas shares have trended lower since – swapping hands for $7 at the time of writing after going as low as $6.96 earlier this morning.
Why Qantas shares are being punished
So why has Qantas felt the pain of this market dip more acutely than most? Well, it's to do with the reason the markets as a whole are falling: tensions in the Middle East. The US attacks on the Iranian military have spooked global markets in general – no one likes an increased likelihood of war, after all.
But since the tensions surround the Middle East, the price of crude oil has been responding sharply. Bloomberg reports that the price of West Texas Intermediate crude is now at US$64.20 a barrel, whilst Brent Crude is going for around US$70 a barrel – its highest level since April last year. This time last month, Brent was asking just US$60 a barrel.
But why does this affect Qantas? Well, the airline's largest fixed cost happens to be jet fuel – which is directly tied to the price of oil.
Out of the $16.48 billion in total operating expenses that Qantas had in FY19, fuel costs made up $3.85 billion of that total, or 23.34%.
So a spike in oil prices directly hits Qantas where it hurts – the bottom line.
Foolish takeaway
And that's why investors have been pushing their Qantas shares out the door this morning.
If tensions in the Middle East escalate further and push up oil price even more, there is nothing but pain in Qantas' immediate future. It's clear many investors don't want to wait around for this to happen – especially as Qantas shares are coming off record highs that we saw around Christmas. Thus, unless crude prices reverse their recent gains, I don't see much short-term upside in QAN shares.
