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Most Airline Stocks Hurt During Wednesday's Trading: Here's Why
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It is no secret that air travel has bounced back very strongly from pandemic lows. Air travel continues to be particularly strong on the leisure front. What is more encouraging is that international demand is also bouncing back nicely. Strong passenger volumes bode well for airline stocks.
Despite the optimism, airline stocks failed to perform well during Wednesday’s trading. Shares of airline heavyweights like Southwest Airlines (LUV - Free Report) and United Airlines (UAL - Free Report) declined 2.6% and 0.3%, respectively, yesterday from Tuesday’s closing price. Consequently, the NYSE ARCA Airline Index slid 1.4% at the close of trading on Sep 6.
What Led to the Price Decline?
It is well known that fuel expenses represent a significant input cost for the aviation space. Consequently, the recent uptick in oil prices does not bode well for airlines. United Airlines’ management stated in an SEC filing that “since mid-July 2023, jet fuel prices have climbed over 20%”.
Oil prices have spiked following Saudi Arabia and Russia’s decisions to extend their voluntary production cuts to the end of the year. Moreover, the likelihood of a pause in interest rate hikes by the Fed has also supported the northward movement of oil prices. This is because higher interest rates generally tend to elevate costs and slow down the economy, which translates to less demand for oil.
Following the increase in the oil price, UAL, Alaska Air Group (ALK - Free Report) and LUV increased their fuel cost per gallon projections for the third quarter of 2023. United Airlines now expects the fuel cost per gallon in the $2.95-$3.05 band (the earlier guidance was in the $2.5-$2.8 range).
Southwest Airlines now expects the fuel cost per gallon in the $2.7-$2.8 band (the earlier guidance was in the $2.55-$2.65 range). Operating revenue per available seat mile for the third quarter of 2023 is now expected to decline in the 5-7% band from third-quarter 2022 actuals (the earlier projection was for a 3-7% decline).
Alaska Air now expects the fuel cost per gallon in the $3.15-$3.25 band (the earlier guidance was in the $2.7-$2.8 range). Due to high fuel costs, the third-quarter adjusted pre-tax margin is now expected in the 10-12% range (earlier guidance was 14-16%). Total revenues are now expected to increase in the 1-2% range from third-quarter 2022 actuals (the earlier projection was for a 0-3% increase).
High Labor Costs – Another Headwind
As if the recent spike in fuel costs was not bad enough for airlines, the northward movement of labor costs adds to its woes. With U.S. airlines grappling with labor shortage in the post-Covid-19 high-demand scenario, the bargaining power of various labor groups has naturally increased. As a result, we have seen pay-hike deals being inked in the space. This is resulting in a spike in labor costs.
Image: Bigstock
Most Airline Stocks Hurt During Wednesday's Trading: Here's Why
It is no secret that air travel has bounced back very strongly from pandemic lows. Air travel continues to be particularly strong on the leisure front. What is more encouraging is that international demand is also bouncing back nicely. Strong passenger volumes bode well for airline stocks.
Despite the optimism, airline stocks failed to perform well during Wednesday’s trading. Shares of airline heavyweights like Southwest Airlines (LUV - Free Report) and United Airlines (UAL - Free Report) declined 2.6% and 0.3%, respectively, yesterday from Tuesday’s closing price. Consequently, the NYSE ARCA Airline Index slid 1.4% at the close of trading on Sep 6.
What Led to the Price Decline?
It is well known that fuel expenses represent a significant input cost for the aviation space. Consequently, the recent uptick in oil prices does not bode well for airlines. United Airlines’ management stated in an SEC filing that “since mid-July 2023, jet fuel prices have climbed over 20%”.
Oil prices have spiked following Saudi Arabia and Russia’s decisions to extend their voluntary production cuts to the end of the year. Moreover, the likelihood of a pause in interest rate hikes by the Fed has also supported the northward movement of oil prices. This is because higher interest rates generally tend to elevate costs and slow down the economy, which translates to less demand for oil.
Following the increase in the oil price, UAL, Alaska Air Group (ALK - Free Report) and LUV increased their fuel cost per gallon projections for the third quarter of 2023. United Airlines now expects the fuel cost per gallon in the $2.95-$3.05 band (the earlier guidance was in the $2.5-$2.8 range).
Southwest Airlines now expects the fuel cost per gallon in the $2.7-$2.8 band (the earlier guidance was in the $2.55-$2.65 range). Operating revenue per available seat mile for the third quarter of 2023 is now expected to decline in the 5-7% band from third-quarter 2022 actuals (the earlier projection was for a 3-7% decline).
Alaska Air now expects the fuel cost per gallon in the $3.15-$3.25 band (the earlier guidance was in the $2.7-$2.8 range). Due to high fuel costs, the third-quarter adjusted pre-tax margin is now expected in the 10-12% range (earlier guidance was 14-16%). Total revenues are now expected to increase in the 1-2% range from third-quarter 2022 actuals (the earlier projection was for a 0-3% increase).
High Labor Costs – Another Headwind
As if the recent spike in fuel costs was not bad enough for airlines, the northward movement of labor costs adds to its woes. With U.S. airlines grappling with labor shortage in the post-Covid-19 high-demand scenario, the bargaining power of various labor groups has naturally increased. As a result, we have seen pay-hike deals being inked in the space. This is resulting in a spike in labor costs.
American Airlines (AAL - Free Report) , currently carrying a Zacks Rank #3 (Hold), recently lifted its forecast for third-quarter non-fuel unit costs due to the four-year pay-related deal with pilots. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Primarily due to high labor and fuel costs, the Zacks Airline industry has declined 9.1% in a month compared to the S&P 500’s 0.1% increase.
Image Source: Zacks Investment Research