Oil price dynamics and airline earnings predictability

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.