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Why Southwest Airlines Is Shrugging Off the Oil Price Spike (but American Airlines Isn't)

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Southwest Airlines' high profit margin and its fuel hedges should help it withstand the recent jump in oil prices.

Oil prices skyrocketed on Monday after a drone attack by Yemen's Houthi rebels -- likely with the support of Iran -- took more than half of Saudi Arabia's production offline. This put pressure on the U.S. stock market, with airline stocks hit particularly hard as jet fuel prices followed oil higher.

However, the impact wasn't felt evenly across all airlines. Southwest Airlines (NYSE:LUV) stock actually inched up slightly on Monday, whereas shares of American Airlines (NASDAQ:AAL) plunged 7%. Here's why rising oil prices pose a much bigger threat to American Airlines than to its crosstown rival.

LUV Chart

Southwest Airlines vs. American Airlines Stock Performance, data by YCharts.

Oil prices surge -- but remain quite moderate

Last weekend's drone attacks won't impact the oil market's balance very much. Saudi Arabia is already restarting production at some oil fields that had been idle recently and should be able to recover completely within a few months -- or even within weeks. Meanwhile, global oil inventories are high and OPEC production cuts over the past year mean that other countries also have spare production capacity available.

Nevertheless, oil prices are incorporating a bigger risk premium in light of the recent attack. This reflects the possibility of retaliation by Saudi Arabia and its allies, the potential for similar attacks on Saudi production in the future, and the risk of an all-out regional war. The Brent crude spot price surged nearly 15% to around $69 per barrel on Monday, which would boost the price of jet fuel by about $0.20 per gallon. (Prices retreated somewhat on Tuesday.)

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