Insights

Why Airline Shares Are Down Today

What happened
Monday is another rough day for the markets, and airline stocks are getting caught up in the downdraft. Shares of Spirit Airlines (NYSE: SAVE) traded down as much as 9%, as of 1:36 p.m. ET, and shares of Delta Air Lines (NYSE: DAL), American Airlines Group (NASDAQ: AAL), United Airlines Holdings (NASDAQ: UAL), and JetBlue Airways (NASDAQ: JBLU) were each down 5% or more.
So what
Fear is in control on Wall Street right now, with the S&P 500 falling more than 2% intraday and hitting its lows for the year. Investors are worried the Federal Reserve’s effort to combat inflation will lead to an economic slowdown. There are also reports of localized surges in new COVID-19 cases, a reminder that the pandemic is not yet behind us.
Image source: Getty Images.

For airline stocks, the uncertainty could not come at a worse time. The industry was hit hard by the pandemic, and had hoped to use strong 2022 summer tourism demand to replenish cash reserves and make progress toward normalizing schedules. High fuel and labor costs were already eating into the bull thesis, and adding fears of a recession and a new round of lockdowns have airlines falling faster than the overall market.
Just a few weeks ago airlines were flying high on earnings season commentary that demand into the summer months was holding up well. But if the Fed can’t induce a soft landing it is unclear whether those gains will be sustainable.
Spirit is likely under increased pressure because the airline also has merger and acquisition uncertainty lingering over it. The airline was the subject of a bidding war between JetBlue and Frontier Group Holdings. Spirit’s board favors Frontier due to the perceived higher antitrust risk in the JetBlue bid, but JetBlue is offering a significant premium compared to Frontier’s offer. And Frontier’s offer is mostly stock, meaning the value is decreasing along with share prices.
Now what
Investors hate uncertainty, and airlines are providing plenty to be uncertain about right now. It is worth noting that the reason the Fed is getting aggressive is the economy appears strong, so there should be some wiggle room before spending falls off a cliff. And although the pandemic remains a threat, consumers have increasingly taken to the skies even when cases are higher.
The airlines should have the wherewithal to weather new turbulence, but the timetable for a recovery keeps getting stretched further out. Given the heightened uncertainty, and how long it might take for airlines to fully benefit from a recovery, airline investors appear content to deplane and watch how the airlines fly through this rough patch from the ground.
Lou Whiteman has positions in Delta Air Lines and Spirit Airlines. The Motley Fool has positions in and recommends Spirit Airlines. The Motley Fool recommends Delta Air Lines and JetBlue Airways. The Motley Fool has a disclosure policy. –

What happened

Monday is another rough day for the markets, and airline stocks are getting caught up in the downdraft. Shares of Spirit Airlines (NYSE: SAVE) traded down as much as 9%, as of 1:36 p.m. ET, and shares of Delta Air Lines (NYSE: DAL), American Airlines Group (NASDAQ: AAL), United Airlines Holdings (NASDAQ: UAL), and JetBlue Airways (NASDAQ: JBLU) were each down 5% or more.

So what

Fear is in control on Wall Street right now, with the S&P 500 falling more than 2% intraday and hitting its lows for the year. Investors are worried the Federal Reserve’s effort to combat inflation will lead to an economic slowdown. There are also reports of localized surges in new COVID-19 cases, a reminder that the pandemic is not yet behind us.

Image source: Getty Images.

For airline stocks, the uncertainty could not come at a worse time. The industry was hit hard by the pandemic, and had hoped to use strong 2022 summer tourism demand to replenish cash reserves and make progress toward normalizing schedules. High fuel and labor costs were already eating into the bull thesis, and adding fears of a recession and a new round of lockdowns have airlines falling faster than the overall market.

Just a few weeks ago airlines were flying high on earnings season commentary that demand into the summer months was holding up well. But if the Fed can’t induce a soft landing it is unclear whether those gains will be sustainable.

Spirit is likely under increased pressure because the airline also has merger and acquisition uncertainty lingering over it. The airline was the subject of a bidding war between JetBlue and Frontier Group Holdings. Spirit’s board favors Frontier due to the perceived higher antitrust risk in the JetBlue bid, but JetBlue is offering a significant premium compared to Frontier’s offer. And Frontier’s offer is mostly stock, meaning the value is decreasing along with share prices.

Now what

Investors hate uncertainty, and airlines are providing plenty to be uncertain about right now. It is worth noting that the reason the Fed is getting aggressive is the economy appears strong, so there should be some wiggle room before spending falls off a cliff. And although the pandemic remains a threat, consumers have increasingly taken to the skies even when cases are higher.

The airlines should have the wherewithal to weather new turbulence, but the timetable for a recovery keeps getting stretched further out. Given the heightened uncertainty, and how long it might take for airlines to fully benefit from a recovery, airline investors appear content to deplane and watch how the airlines fly through this rough patch from the ground.

Lou Whiteman has positions in Delta Air Lines and Spirit Airlines. The Motley Fool has positions in and recommends Spirit Airlines. The Motley Fool recommends Delta Air Lines and JetBlue Airways. The Motley Fool has a disclosure policy.

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