Airline stocks have not performed well this year due to multiple factors like high fuel and labor costs, technical glitches and labor unrest. The negative sentiment surrounding the space can be gauged from the fact that the Zacks Airline industry has shed 20% of its value compared with the Zacks S&P 500 Composite index’s 1.6% decline on a year-to-date basis.
November’s Oil Price Rout
Despite the overall bearish performance, as highlighted above, things were looking up for airline stocks over the past month. This is because oil prices registered the steepest monthly decline since 2008 in November. In fact, the commodity ended the month at $50.93 a barrel, bringing its monthly decline to around 22%.
It is a well-known fact that oil prices are inversely related to the health of airline stocks as fuel-related expenses form a major chunk of airline expenditures.
Airlines Plummet Again on Dec 7
The optimism pertaining to the recovery of airline stocks was hurt on Friday as the companies suffered biggest one-day loss since Feb 26, 2016. Shares of key airline players tumbled on Dec 7, leading to the NYSE Airline Index’s decline of 5.1% to $99.34. Notably, legacy carriers like American Airlines Group (NASDAQ:AAL) , United Continental Holdings (NASDAQ:UAL) and Delta Air Lines (NYSE:DAL) declined 9.1%, 5.2% and 3.5%, respectively, on the same day.
All three above-mentioned companies carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Apart from concerns regarding economic growth, the fact that OPEC members and their allies agreed to reduce oil production from January to curb oversupply fears induced decline in airline stocks.
Over the past month, oil prices have been on a downtrend due to fears of oversupply and a soft demand outlook. Although low oil prices are a boon for airline stocks, given their significant decline in operating expenses, the scenario might prove to be a double-edged sword for the sector participants.
In the low oil-price scenario, unit revenue performance is likely to suffer due to low fuel surcharges on international flights. In fact, the likes of Delta Air Lines and Hawaiian Holdings (NASDAQ:HA) have recently trimmed their respective unit revenue projections for the fourth quarter of 2018.
Capacity discipline in the airline space is also likely to be hurt by low oil prices. The dismal performance of airlines on Friday can also be attributed to the 130 basis points decline in November load factor (percentage of seats filled by passengers) at Southwest Airlines’ (NYSE:LUV) as capacity expansion outweighed traffic growth.
Earlier too, capacity- and pricing-related woes affected investors in the airline space. They feared that due to weak oil prices, capacity expansion may lead to oversupply in the market. Return of capacity-related concerns, as highlighted by Southwest’s traffic report, would pose further challenges to the airline space.
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