Shares of major airlines stocks like Delta Air Lines (DAL - Free Report) , United Continental Holdings (UAL - Free Report) , Southwest Airlines (LUV - Free Report) and American Airlines Group (AAL - Free Report) lost ground following the disappearance of an EgyptAir jet. With airline stocks plummeting on the news, the NYSE ARCA Airline index declined 1.48% to $83.62 on May 19.
According to various media reports, EgyptAir (MS804), which was flying from Paris to Cairo, dropped off the radar over the Mediterranean sea. Apparently, 56 passengers and 10 crew members were on board the Airbus Group SE’s (EADSY - Free Report) A320. According to latest media report, debris from the plane were found in the Mediterranean Sea.
Will Travel Demand Drop?
According to a Bloomberg report, Egypt’s aviation minister Sherif Fathy cited terrorism as a probable cause behind the incident. If the speculations come true, this would mark the second major terror act in the aviation space. We remind investors that in March this year, terror attacks at the Brussels airport and the Maelbeek metro station in central Brussels claimed over 25 lives and injured more than 200 people.
The disappearance of the EgyptAir jet liner and the subsequent fear of another terror attack hit tourism stocks with the effect spreading to the U.S.-based airline stocks which lost value on apprehensions of a fall in travel demand in Europe. We note that major airline stocks have a strong presence in the European market. For instance, Delta Air Lines had stated during its first-quarter conference call that the trans-Atlantic market is responsible for 15% to 20% of its revenues. No wonder, the fear of a fall in air travel demand has hit U.S. airline stocks hard.
Apart from the major airline stocks, the Chicago-based plane manufacturer The Boeing Company (BA - Free Report) declined 2.22% on May 19 with the Bloomberg report suggesting a drop in travel demand which may lead to lower orders for manufacturers. However, the impact of the disappearance of the EgyptAir flight on U.S. aviation stocks has been quite an exaggeration according to some market watchers.
Terror Attacks: A Major Concern
Even though airline stocks are benefiting immensely from the oil price slump, acts of terrorism continue to hurt stocks in the space. In fact, such attacks are becoming alarmingly more frequent. The March Brussels attacks impacted Delta’s top line in the first quarter of 2016 while the attacks in Paris last year had impacted Air France-KLM SA (AFLYY - Free Report) .
Apart from terror attacks, challenges like outbreaks of diseases like the Zika virus and disputes similar to the ongoing one between legacy U.S. carriers and their Gulf counterparts are a major threat to aviation stocks.
Although it has not yet been proved conclusively that the flight from Paris to Cairo was a victim to another terror act, we believe that in the event of it being proved so, travel to Europe will take a hit. In case of a drop in demand during the peak summer season, U.S. airline stocks would suffer as trans-Atlantic flights generate a significant portion of their revenues.
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