Grounded: $100 Oil Spells Doom For Airline ETFs

It's obvious that one need not have an MBA from Harvard to figure out that rising oil prices are not the best of news for airline stocks. Just as oil prices started to perk up in earnest last year, we touched on this very topic, arguing that airlines would be imperiled by higher oil prices regardless of improvements in business and leisure travel. Welcome to 2011, perhaps the year of the major regime change in the Middle East. On the back of escalating violence in Libya, NYMEX-traded crude for April delivery popped above $100 earlier today, reaching levels not seen since October 2008. Keep in mind that while Libya is home to Africa's largest oil reserves, the OPEC member produces just 1.1 million barrels of oil per day. How bad are things now for an ETF like the Guggenheim Airline ETF FAA? Well, the chart will make you more ill than some bad turbulence and a rough landing. In November, FAA was trading over $43. It now resides below $36. The newly minted Direxion Airline Shares FLYX? Forget about it. This thing has anemic average daily volume and is now making new lows. The math is quite simple regarding why FAA and FLYX are going to be grounded as long as oil rises if contagion spreads in the Middle East. For every $1 oil rises, the U.S. airlines face an additional $415 million to $425 million in fuel costs, according to Option Investor. Forget today's increase in oil prices for a moment. As of Tuesday, oil futures spiked $8 in two weeks. Multiply $425 million by eight and you get $3.4 billion in added expenses, Option Investor notes. That's not much below the COMBINED market values of American Airlines AMR and US Airways LLC. Use your imagination: What happens to FAA's constituents if Saudia Arabia sees protests or worse, the ruling royal family is toppled? There's the recipe for $150-$200 oil and a recipe that could send some FAA and FLYX constituents the way of the dodo bird.