Stocks of prominent commercial airlines have experienced a decline in recent months owing to sluggish growth and rising fuel costs. Now the fear of a government shutdown threatens to further dampen market sentiment.
JetBlue stock has declined 32% and Spirit Airlines shares have fallen 18% since last year. Stock numbers also show that airline stock prices of many major carriers ticked up in July this year and have fallen sharply since then. After hitting a 52-week high in July, Delta Airlines declined 24% to $37 Friday close. United Airlines stock price has fallen 27% and closed at $42 while American Airlines declined 32% and closed at $13 after also hitting 52-week highs in July.
Airline stock closing prices on Sept 29; Source: Yahoo Finance
The airline sector has a history of volatile performance though there was a sharp increase in travel demand post the pandemic which briefly led to an enthusiasm for the stocks of industry leaders like United Airlines and Delta at the stock market. Now that travel enthusiasts are back home and airlines are losing relevance again due to recent developments, the market is shunning these stocks.
“The issues going on in the airline industry are far from over. If the federal government shuts down, that could severely hurt the sector and weigh on investor sentiment,” said Michael Linenberg, an analyst from Deutsche Bank.
Federal government will shut down on Oct 1 unless the Congress passes a legislation to renew funding by tomorrow, September 30.
According to Linenberg, thousands of non-essential FAA or Federal Aviation Administration employees will be forced to go on leave, FAA-certification programs will face delays, and the airport construction would halt abruptly.
Additionally, as reported by Business Insider earlier this week, airports might face a shortage in air traffic controllers. Though these employees are considered essential government employees and will continue to work during the shutdown, air traffic controller training will shutdown as well which would worsen the situation since air traffic controller facilities are already understaffed.
Oil prices soaring close to $100 per barrel thanks to supply cuts from crude processors in Russia and Saudi Arabia also means trouble for airlines since they must now contend with mounting fuel costs.
Jet fuel prices have climbed over 20% since mid July, according to a Zacks analyst report released on September 28. United has had to increase its fuel cost per gallon projections for the third quarter of 2023 and now expects fuel cost per gallon in the $2.95 -$3.05 band (earlier guidance was in the $2.5-$2.8 range). Meanwhile, Delta Airlines also expects average fuel cost per gallon in the range of $2.75-$2.90.
However, rising fuel costs is not the sole reason why airline stocks have lost favor in the US stock market.
Labor costs are also a problem, according to Scott Group, a senior research analyst from Wolfe Research who suggests that “increasing labor costs, low liquidity and headwinds arising out of the decision to terminate the alliance with American Airlines represent major headwinds for JBLU.” The analysis on JetBlue was released on September 22.
Other major airlines are also experiencing pressure from high labor costs, which are hurting their bottom line by pushing up operational costs.
To make matters worse, rising fuel costs and labor costs happen to coincide with a rapid decline in airfares across major domestic commercial planes. According to Fed data, airfares in August were down 13.3% from the same time last year.
“Now that the pandemic driven demand for travel is over and ticket prices are going down, airlines will grapple to offset surges caused by rising fuel and labor costs.” Linenberg continued.
These turbulences have had a significant impact on earnings of airlines such as American Airlines and Spirit Airlines. American Airlines has slashed its earnings per share outlook for the current quarter to $0.20-$0.30 which is significantly down from its previous estimate of $0.85 to $0.95.
Meanwhile, Spirit Airlines has reduced its projection of third quarter revenue from $1.30 billion – $1.32 billion range to $1.25 billion to $1.26 billion. The company also stated that its operating margin is expected to drop more than originally anticipated. It’s now projected to fall between 14.5% and 15.5%, a significant decrease from the earlier estimate of 5.5% to 7.5%.
Some investors believe that certain airline stocks, such as Delta Airlines, are a strong buy.
There is an improved air-travel demand on the domestic front and Delta reported better than expected earnings per share and revenues in second-quarter 2023. Delta’s board of directors also approved a quarterly dividend payment of 10 cents per share. This resumption of dividend pay highlights its shareholder-friendly stance and is indicative of Delta’s financial progress, according to a note released on September 19 by John Staszak, an analyst from Argus Research.
“It’s better to buy when share prices are low, especially when there is a strong possibility that Delta will bounce back,” Staszak said.