Airline Stocks Are Down 25% Since February. Is This a Buying Opportunity or a Falling Knife?

Something big happened to the airline industry last month. If you haven't been paying attention, you might be sitting on an opportunity without even knowing it.

Here's the short version: The U.S. and Israel struck Iran on February 28. Iran shut down the Strait of Hormuz, the narrow waterway that moves about 20% of the world's oil. 

Jet fuel prices shot from $2.11 a gallon in January to nearly $4 by mid-March. That's a 61% jump in six weeks. And airline stocks? They've taken a beating.

United Airlines (UAL) is down about 24% YTD. Delta (DAL) is off roughly 28%. American Airlines (AAL) has dropped over 35%. These are big numbers for some of the most widely-held stocks in any retail investor's portfolio.

So the question every investor is asking right now is simple: Is this a chance to buy the dip? Or is there more pain ahead?

Think of jet fuel like groceries for airlines. It's their single biggest controllable cost after labor — anywhere from 20% to 30% of everything they spend. When fuel prices spike this fast, it hits their bottom line almost immediately.

And this spike is historic. According to S&P Global Energy, Mideast refineries were sending roughly 470,000 barrels of jet fuel per day through the Strait of Hormuz to airports in Europe and Asia. That flow has nearly stopped. The result? The biggest oil supply disruption in recorded history, according to multiple energy analysts.

United Airlines CEO Scott Kirby said higher fuel costs would "probably start quick" when it comes to hitting earnings. He told CNBC the impact would be "meaningful" on Q1 — and potentially Q2 as well if the war drags on.

Meanwhile, Deutsche Bank analysts found that domestic airfares for late-March bookings climbed between 15% and 124%, depending on the route. Transcontinental flights more than doubled in price on some carriers. Spirit went from $86 to $193 on certain routes. And international carriers like Cathay Pacific have already doubled their fuel surcharges.

That's a real burden on travelers. But for investors, it's more complicated.

Here's what I think most casual observers are missing: airlines aren't all the same.

Some carriers have been smart about fuel hedging. Hedging is basically buying fuel in advance at a fixed price — like locking in your gas price before it goes up. Lufthansa and Ryanair have strong hedges in place. So do Cathay Pacific and Korean Air. U.S. carriers, on the other hand, rely far less on hedging than their overseas rivals. That makes them more exposed when oil spikes.

That gap matters more than you might think. It's one reason why European and Asian airline stocks bounced faster after Trump hinted the war could end "very soon." Cathay Pacific was up 3.6% on Tuesday. Korean Air rose 3%. Some U.S. carriers were still down 2–4% the same day.

The other thing to watch: demand. Travel demand was actually strong heading into this year. UBS analysts noted that airlines' "upbeat outlooks on demand to start the year" make the environment "conducive for passing along fare increases." In plain English: if people still want to fly, airlines can raise prices to cover their costs.

The catch? If inflation keeps pinching household budgets, people may cut back on travel. Deloitte's 2026 Travel Industry Outlook noted that travel demand could be "showing signs of strain" due to broader economic pressure. That demand picture is the big wild card.

Let's be direct about each one.

United Airlines (UAL) — ~$92/share 

This is the one analysts are most excited about. Wall Street's average 12-month price target is around $132, implying roughly 43% upside from current levels. Jefferies kept a buy rating, but lowered its target after raising fuel cost estimates for Q1 and Q2. The bull case: fuel prices normalize in the second half of 2026 as geopolitical tensions ease. United has a massive global network, strong loyalty revenue, and over $2 billion in projected free cash flow. It's the most resilient large U.S. carrier right now.

Delta Air Lines (DAL) — ~$43/share 

Delta is strong operationally. Premium cabin demand has held up well. Its co-brand credit card partnerships bring in steady, fuel-independent revenue. Analysts see upside from current levels, though the picture is murkier than UAL's given its exposure to transatlantic routes affected by airspace closures.

American Airlines (AAL) — ~$10.80/share 

This is the trickiest one. Analysts have a "Buy" rating on average with a $15.58 target, that's 44% implied upside, but $AAL ( ▲ 2.63% ) comes in with significant debt and thin margins. It's a high-risk, high-reward position. If the war ends quickly and fuel normalizes, AAL could bounce hard. If not, it faces real pressure. Deutsche Bank previously warned sustained elevated fuel costs could be an "existential threat" to weaker carriers in the industry.

Southwest Airlines (LUV) — ~$27.50/share 

Southwest is interesting. It was actually up 23% year-to-date as of mid-February before the war hit. It's now pulled back, but holds a lower cost structure on domestic routes. Its domestic focus means less exposure to Middle East airspace chaos. But it also hedges fuel modestly, which gives it some protection others lack.

UBS analysts see near-term pain, but said the industry is "conducive for passing along fare increases." Morningstar's Lorraine Tan put it clearly: "The issue for airlines now is that travel demand may be curtailed as costs become prohibitive for leisure travelers." That's the real risk — not just fuel cost, but demand destruction.

Jefferies' thesis hinges on one key assumption: oil prices retreat in H2 2026 as the conflict winds down. If that happens, carriers like UAL and DAL — with strong route networks and loyal premium customers — are well-positioned to recover fast.

Secretary of Transportation Sean Duffy expressed optimism about a "recovery in energy markets." And Trump's own comment that the war could end "very soon" moved markets. But no one knows when that happens.

This is a moment of real uncertainty. Airline stocks are genuinely cheap by historical standards. The P/E ratios on UAL and DAL are in single digits—that's low. Wall Street still sees 40%+ upside across the board.

But "cheap" isn't the same as "safe." If oil stays at $100 a barrel through summer, the pressure builds. If the Strait of Hormuz stays effectively closed, more routes get cut, more flights get canceled, and more airlines consider pulling guidance, the way Air New Zealand already did.

So what should you actually do? That depends on your timeline and risk tolerance. Short-term? This sector is volatile. If oil spikes again, these stocks move fast in both directions. Longer-term? The fundamentals for large network carriers like United and Delta remain strong. Travel demand doesn't disappear, it adjusts.

Watch the oil price. Watch the Strait. And watch whether airlines can keep filling seats at higher prices.

That's the real story here.