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High fuel prices will crash airlines

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So far, 2012 has been a good year for the Guggenheim Airline ETF ( FAA , quote ). The exchange traded fund for the airlines is up 11.16%, but rising fuel costs are likely to end the rally soon.

USA Today is predicting record fuel prices soon, with the national average topping out at $4 and more drivers than ever paying $5 per gallon for gasoline. Reporter Gary Strauss attributes the hike to "rising oil prices, lower refining capacity, Middle East tension and speculators" -- a canny assessment, since 30% of the price of oil is due to speculation .

Oil prices are close to $110 per barrel, and fuel costs make up 40% of the expenses for the airline. This is why despite its year-to-date growth, FAA is still off 18% over the last 52 weeks.

Individual airlines are showing comparable performance. China East Airlines ( CEA , quote ) is down 15.11% for the last year, and 10.48% in the last quarter.

There is one bright spot, however. United States Oil ( USO , quote ), was as low as $29.10 in October. It closed at $40.77 on Friday, and any investor who bought oil and avoided airlines has to be feeling pretty good.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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