Oil price dynamics and airline earnings predictability. (August 2020)

• Record Type: Journal Article
• Authors: Wang, Huabing; Gao, Xiang
• Is Part Of: Journal of air transport management. Volume 87(2020)
• Publication Date: 2020-08
• Subjects: Airline earnings -- Oil price volatility -- Analyst forecasts -- Earnings predictability -- Supply shock -- Demand shock; Airlines -- Management -- Periodicals; Aeronautics, Commercial -- Management -- Periodicals; 387.7068
• DOI: 10.1016/j.jairtraman.2020.101854
• Languages: English
• ISSNs: 0969-6997

Abstract

Abstract: This study examines the effect of oil price dynamics on quarterly earnings and their predictability with a sample of 30 airlines for 1994–2017. First, we document a significantly positive impact of demand-driven oil shocks on airline earnings, suggesting that the revenue effect from shifting air travel demands dominates the cost effect of aviation fuels. Regarding earnings predictability, we find evidence of deterioration in oil-volatile quarters as indicated by both the earnings variability based on common benchmarks and the quality of analyst forecasts issued early in the quarter. We further show that supply-driven oil shocks have a more detrimental impact on earning predictability than demand-driven oil shocks. Finally, we do not find supporting evidence for the possible moderating effect of hedging. Highlights: Demand- and supply-driven oil shocks affect airlines differently. Supply-driven oil shocks have a more detrimental impact on airline earnings predictability. Demand-driven oil shocks positively affect airline earnings, suggesting the dominating revenue effect over the fuel cost effect. Airline earnings predictability worsens in oil-volatile quarters. Consensus analyst forecasts after the end of the quarter are not negatively affected by higher oil price volatility. Hedging does not appear to alter the impact of oil price dynamics on airline earnings or predictability.