A new study reveals how news and external uncertainties, like rising investor fear and geopolitical risks, affect the financial performance of airline companies.
A new study reveals how news and external uncertainties, like rising investor fear and geopolitical risks, affect the financial performance of airline companies. By analysing airline equity returns, researchers found that some shocks have long-term effects while others are short-lived, highlighting the unique challenges facing the aviation industry.
The study published in Economic Letters uses advanced forecasting methods to analyse how external factors influence airline stock performance. It shows how rising investor fear is the most significant and long-lasting uncertainty affecting airline equity returns, while other factors like fuel costs and geopolitical risks have shorter-term impacts.
Dr Scott Mahadeo, Senior Lecturer in Macroeconomics at the University of Portsmouth explained: “Airline firms are uniquely vulnerable to external shocks, from geopolitical tensions to climate policy changes. Our study shows that investors’ fear has the most enduring negative effect on airline stocks. This insight is vital for financial planning in the industry, especially as it looks to navigate a future shaped by global uncertainties.”
Airline firms are uniquely vulnerable to external shocks, from geopolitical tensions to climate policy changes. Our study shows that investors’ fear has the most enduring negative effect on airline stocks. This insight is vital for financial planning in the industry, especially as it looks to navigate a future shaped by global uncertainties.
Key findings from the study include:
- Rising Investors’ Fear: The most pronounced impact on airline equity returns, with negative effects lasting up to a year.
- Geopolitical Risk: A short-lived but significant negative effect on stock performance, primarily within the first month.
- Climate Policy Uncertainty: Surprisingly, a rise in uncertainty around climate policies positively impacts airline stocks in the short term, possibly reflecting investor confidence in airlines’ ability to navigate policy changes.
- Fuel Price Uncertainty: Initially reduces airline equity returns but can turn positive over time as airlines implement risk mitigation strategies.
- Infectious Disease Outbreaks: Limited long-term impact on airline equities, with COVID-19 being a notable exception due to its unprecedented scale.
The research emphasises the importance of diversifying strategies to manage these risks. Accelerating green transitions, for example, could help airlines reduce their exposure to fossil fuel price volatility and climate-related uncertainties.
For young investors and financial planners, the study provides valuable insights into how external shocks shape the aviation industry’s financial landscape. It encourages future research to explore how news impacts airline stocks during stable versus volatile market conditions.