Australia's fuel prices are soaring as the conflict in the Middle East continues to disrupt the global supply of oil. And Australia's major airlines, Qantas Airways Ltd (ASX: QAN) and Virgin Australia Holdings Ltd (ASX: VGN), are feeling the pinch.
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How does tight oil supply affect Qantas and Virgin Australia?
The largest operating cost for airlines is jet fuel, which is refined from crude oil.
Australia produces very little of its own refined fuel and instead imports more than 90% of the fuel it uses. This means local prices closely follow global oil prices and currency movements.
So when oil prices rise due to tight supply or geopolitical tensions, the cost of jet fuel also increases.
If tight oil supply continues and jet fuel prices climb higher, airlines like Qantas and Virgin Australia face higher operating costs, which can pressure profits and potentially weigh their share prices.
Airlines could increase ticket prices or add fuel surcharges to help recover some costs, but if raised too high it could also reduce travel demand.
What has happened to Qantas and Virgin Australia shares?
Qantas shares are 0.64% higher at the time of writing on Tuesday morning, trading at $8.62 a piece. But for the year to date, the airline's stock is down 17.79%. Since conflict in the Middle East ramped up at the beginning of the month, Qantas shares have shed 13.57% of their value.
Virgin Australia's share price movements show an almost identical pattern. At the time of writing, the airline stock is 0.95% higher at $2.66 a piece, but it is 23.71% lower year to date. Virgin Australia shares have tumbled 15.45% in March alone.
It's not only global oil supply concerns that have created headwinds for the two major airline businesses. News that Qantas has reached an agreement to settle the class action regarding flight credits during the global COVID pandemic has also dampened investor confidence.
Meanwhile, reports indicate that Virgin Australia's partnership with Qatar Airways is being tested as the conflict in the Middle East continues to affect aviation routes. Qatar Airways currently owns 25% of Virgin Australia and provides aircraft and crew for several services under a wet lease arrangement.
What can we expect next?
As the market stands, analysts remain optimistic about the outlook for Qantas and Virgin Australia shares, with most tipping strong upside ahead.
TradingView data shows that 12 out of 15 analysts still have a buy or strong buy rating on Qantas shares. The average target price is $12.29, which implies a potential 42.73% upside at the time of writing.
Meanwhile, six out of eight analysts have a buy or strong buy rating on Virgin Australia shares. The average target price is $3.89, implying a significant 46.91% upside at the time of writing.
