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Airline Operations Disrupted as Harvey Wreaks Havoc

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Normal life has been disrupted with the tropical storm Harvey wreaking havoc, and is expected to cause further damage. In fact, the storm caused severe devastation throughout the weekend with Houston – the fourth largest city in the country -- experiencing the worst hit.

Meanwhile, the city has been witnessing unprecedented rainfall, resulting in multiple causalities. Also, the flooding is expected to continue as Texas is battered by heavy rains due to the storm.

Notably, Harvey, which has been downgraded to a tropical storm from a category-four hurricane, is expected to remain over Texas until mid-week.

Flight Cancellations at Large Due to Harvey

In view of the extensive damage, it is of little wonder the natural calamity impeded travel disrupting operations of airlines. In fact, Harvey resulted in significant travel disruptions over the weekend leading to multiple flight cancellations/delays at the George Bush Intercontinental and William P. Hobby airports, resulting in untold miseries and harassments to passengers.

According to a Bloomberg report, operations at United Continental Holdings UAL were significantly crippled due to the natural calamity as it relies extensively on its hub at Houston, causing it to cancel a huge number of flights therein to ensure the security of its passengers. Currently, United Continental carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other carriers like Southwest Airlines Co. LUV had to trim Houston operations. According to The Wall Street Journal, American Airlines Group AAL had to cancel 110 flights on Aug 27 due to the calamity, majority of them to and from Houston.

Moreover, in a bid to mitigate the harassments of passengers, most carriers including the likes of Delta Air Lines, Inc. (DAL - Free Report) , Alaska Air Group ALK, American Airlines, Southwest Airlines and JetBlue Airways Corp. JBLU have made offers to passengers who are rescheduling their travel dates. These passengers will be able to do so without paying any additional charges. 

Markedly, with the two Houston airports - George Bush Intercontinental Airport and William P. Hobby Airport - closed as heavy rainfall continues to hit Houston, air travel is expected to be hurt further this week.

Evidently, weather-related issues have hurt airlines previously too. In March 2017,operations at carriers were disrupted big time by winter storm Stella. Moreover, this January, an icy winter storm ravaged the Southeast U.S. cities. It also disrupted the flight schedules of airlines, thereby causing undue harassment. Last year, Hurricane Matthew had also caused extensive damage in the affected areas.

In fact, such acts of nature throw the schedules of carriers out of gear, causing multiple flight cancellations.

Other Headwinds Hurting Airlines Lately

Apart from the Harvey-related disruption in operations, airlines have been laid low lately by quite a few other happenings.

The twin terror attacks in Spain, earlier in the month that claimed multiple lives apart from injuring many, caused travel-focused stocks include airline players to lose value. Such acts of terrorism might cause travel demand to dwindle due to security fears. Naturally, airline stocks are hurt by this anticipation.

Moreover, fears related to capacity overexpansion were re-ignited with July traffic reports of most carriers exhibiting a fall in load factor (percentage of seats filled by passengers). The downturn was due to capacity expansion outweighing traffic growth.

Generally, carriers are forced to reduce fares as unit revenues decline in the face of capacity outpacing demand growth. While low air fares are favorable for fliers, it is a drag on the top lines of carriers with their profits being hurt.

Also, the decision of Warren Buffett, one of the most revered investors of all time, to trim his stakes in three airline heavyweights – Delta, United Continental and American Airlines – also points at the fact that all is not well with this key sector.

Price Performance

In view of the above recent headwinds, it is of little wonder that the Zacks industry fared worse than the broader market in the last one month. The S&P 500 Index contracted 0.9% compared with the industry’s decline of 3%.

High Labor Costs Remain a Drag

In addition to the recent challenges, high labor costs have hurt airlines for the last few quarters. With airline companies constantly inking deals with various labor groups, it is of little surprise that costs on this front are increasing, which is limiting bottom-line growth.

The situation on this front is not expected to improve in the third quarter as well. Delta expects non-fuel unit cost (including profit sharing) to increase approximately 4%. Additionally, consolidated cost per available seat miles (excluding special items and fuel) is anticipated to increase 5% at American Airlines. Again, Allegiant Travel Company ALGT expects cost per available seat miles (CASM), excluding fuel, to increase in the band of 16-18%.

Bottom Line

With airline companies already grappling with multiple headwinds, the emergence of Harvey has only added to the woes of stocks in the space. Consequently, investors are expected to remain glued to the updates, as stocks strive to return to their winning ways

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