When oil producing nations sneeze, transportation stocks catch a cold.  But if a new wave of protests continues to go viral in Iran and Oman, airlines and freight transport shares could catch the financial version of swine flu. 

Here’s why: fuel eats up a hefty share of operating costs for companies in the transportation sector – currently as much as 40% for airlines.  And the rising threat of hiccups in the world’s oil supply can imperil earnings – particularly if they generate any sustained support for oil prices over $100 a barrel.

Transportation stocks were sent reeling on Tuesday, with particularly fuel-price sensitive airline shares down significantly.  US Airways (NYSE:LCC) dropped nearly 8%; Delta (NYSE:DAL) closed down 5.6%; United Continental (NYSE:UAL) fell 4.2% and American Airlines’ parent AMR Corp. (NYSE:AMR) closed down 2.7%

In early Wednesday trading, the Dow Jones U.S. Airlines Index was essentially flat, as oil prices had retreated slightly from a peak of $101.47 a barrel earlier in the session.

Major trucking industry shares Landstar (Nasdaq:LSTR), Heartland Express (Nasdaq:HTLD) and J.B. Hunt Transport (NASDAQ:JBHT) were down an average of 2.5% on Tuesday, while package delivery leaders UPS (NYSE:UPS) and FedEx (NYSE:FDX) slid by an average of just more than 2% on the day. 

Even though skyrocketing oil prices have less of an impact on rail freight operations, major railroads Union Pacific (NYSE:UNP) and CSX (NYSE:CSX) closed down an average of 2.8% on Tuesday.

Although oil prices settled down a bit late last week after the crisis in Libya pushed prices over $100 a barrel, new protests in Iran and Oman have provoked fresh concerns over potential oil supply disruptions. 

The growing political turmoil in Iran and Oman potentially could have a far greater impact on fuel prices than did the recent crises in Libya, Egypt and Algeria for two reasons. First, Iran is the second-largest OPEC oil producer behind Saudi Arabia, accounting for some 3.7 million barrels a day; Oman produces an additional 860,000 barrels a day.  Perhaps even more significantly, both Iran and Oman border the Strait of Hormuz, the most critical oil choke point in the world. Seven times more oil passes through the strait each day than through the Suez Canal.   

Political unrest in the Middle East poses a clear and present danger to the global economic recovery.  “Sustained rises in the prices of oil or other commodities would represent a threat both to economic growth and to overall price stability, particularly if they were to cause inflation expectations to become less well anchored,” Federal Reserve Chairman Ben Bernanke told a Senate Banking Committee hearing on Tuesday.

Bottom Line: When it comes to managing the impact of political instability on oil prices, transportation companies must hope for the best, but plan for the worst.  With crude oil futures hitting their highest level in more than two years on Tuesday, airlines may need to supplement hedging with far higher fares and fees, fuel surcharges, and capacity cuts. 

UPS and FedEx are better positioned to absorb short-term fuel-price shocks because domestic shipping customers have few reasonable alternatives that can meet their tight time windows, making the services better able to raise rates and add surcharges. 

Fuel cost hikes are more of a challenge for truckload and less-than-truckload carriers, but tight capacity in the sector leaves shippers with few other options.  Railroads have a bit of an advantage as well since they can move a ton of freight up to 500 miles on a gallon of fuel, compared with a top of about 130 miles for trucking companies, according to the Federal Railroad Administration.  Still, if oil prices spike and the economy tanks, everybody pays one way or another. 

As of this writing, Susan J. Aluise did not own a stake in any of the companies mentioned here.