Against a backdrop of soaring oil prices and ongoing engine recalls, commercial airline stocks have remained stalled since early July, raising questions about their resilience.
The JETS ETF, dropped 17% from its highest point in the past year on July 11 and fell below the S&P 500’s performance in late August. Delta Airlines, a sector front-runner, also declined by 17% from its one-year high, and it’s on track to underperform the S&P 500 for the year as well.
After falling during the pandemic, airline stocks rose sharply this year as people eager to escape pandemic-induced cabin fever filled flights. But recent turbulence has sent the stocks into a dive, although some see the declines as an opportunity to pick up bargains.
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“The group had been doing really well on all the revenge traveling earlier in the year,” says Alec Young, chief investment strategist at Mapsignals. “They’ve all had to come out and update their earnings guidance for this higher oil price environment, which has generally been negative news they’ve been announcing, and so airlines have been under pressure.”
Firstly, in late July, Pratt & Whitney, a key aerospace manufacturer under RTX, announced metal contamination in their geared turbofan engine (GTF) engine parts from 2015 to 2020, leading to grounded aircraft for inspections. These engines power about 40% of Airbus’ A320neo jets, a globally significant aircraft segment. The A320neo set a record as the fastest-selling aircraft since its 2014 launch, as reported by Bloomberg.
“While some carriers are uniquely challenged by the GTF issues and some more so by weather and fuel, it is clearly not helping the bottom line,” says Michael Linenberg, an analyst with Deutsche Bank. “The industry as a whole has been facing numerous constraints across the aviation ecosystem. However, some have managed around the issues better than others.”
For example, Deutsche Bank’s analysis suggests that Volaris and Spirit Airlines could see roughly half of their aircraft grounded due to inspections, whereas Delta and American Airlines are expected to be impacted by inspections on only 4% of their fleets. RTX plans to conduct inspections on approximately 1,200 engines over the next year.
About the same time, oil prices soared when Saudia Arabia and Russia extended their oil production cuts until year’s end in an effort to raise crude oil pricess causing concern for industries reliant on gas. As a result, airlines like American had to reduce their upcoming quarter’s financial expectations by 69-76% due to expected higher fuel costs while Delta reduced theirs by 16-18% as well as a few others. Despite airlines benefiting from low fuel costs not long ago, the ongoing rise in oil prices, exceeding $90 per barrel last week, continue to pose challenges to airlines.
Still, some see this as a turbulence to glide through and others as an opportunity to affordably buy into a sector that always seems to make a comeback. “The Big 3 (Alaska, Delta, and American Airlines) are likely to surprise on fourth-quarter revenue, and airline stocks are poised for a bounce,” says Daniel McKenzie, a senior analyst at Seaport Research Partners. “The selloff on reduced estimates is understandable, but it’s a disconnect from underlying fundamentals.”
Several airlines have signaled this optimism, with Delta reinstating its quarterly dividend at $0.10 per share in mid-July and the potential for it to return to pre-pandemic levels of over $0.40 per share if travel demand remains strong. On top of that, Delta revised its revenue projection from a potential 4% decrease to a more favorable 2-3% decline. Additionally, Fitch upgraded American Airlines’ credit rating in July, adding to the positive signs within the sector.
On the retail side, some investors are taking advantage of the affordability of airline stocks to add shares to their portfolio while the price is low, betting on the their ability to get back off the ground as it historically tends to.
“I don’t see airplanes going away any time soon. It’s not like so many other companies whose future is in danger because of AI,” says Sam Kindo, an independent trucker who has been steadily adding shares of Delta and JETS ETF to his IRA portfolio. “I can afford it much more easily than other stocks like Nvidia, and I feel confident that the prices right now are a bargain. I’m sensing a comeback down the road.”