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Why Airline Stocks Were Grounded in Tuesday's Trading

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Airline companies have been undergoing turmoil of late due to the recent extensive devastation caused by hurricane Harvey. It’s small wonder that the natural calamity has impeded travel globally, disrupting the airline operations. In fact, Harvey led to multiple flight cancellations. Further adding to the woes, airline stocks have been struck by an additional headwind.

Reasons Behind The Stocks’ Plunge

Shares of major airline companies declined following Delta Air Lines, Inc.’s (DAL - Free Report) traffic report for August. Also, theNYSE ARCA Airline Index declined 1.4% at the close of business on Sep 5. Delta’s shares have dipped 3.5%, while shares of its peers namely, American Airlines Group Inc. (AAL - Free Report) , JetBlue Airways Corporation (JBLU - Free Report) , United Continental Holdings Inc. (UAL - Free Report) , Southwest Airlines Company (LUV - Free Report) and Alaska Air Group Inc. (ALK - Free Report) have sunk substantially.

Delta reported a 6.9% rise in air traffic for August, while capacity expanded 2.7% for the ongoing month. On the other hand, load factor or percentage of seats filled by passengers, increased 350 basis points to 87.9%.

However, the carrier has lowered guidance for the third quarter of 2017 citing reasons like tougher competition and higher fuel costs. Surprisingly, it made no claims on either Hurricane Irma or Harvey having a bearing on the current scenario.

The carrier now anticipates passenger unit revenue for the said quarter to increase in the band of 2-3%. Previous guidance had called for an increase in the 2.5-4.5% range. Operating margin is expected to improve in the range of 16.5-17.5% from the former 18-20% band. The airline however, raised its outlook for fuel prices to $1.68-$1.73 from the earlier $1.55-$1.60 bracket on the back of upsurge in market price which began in late July.

Spirit Airlines (SAVE - Free Report) too trimmed its view for revenue per available seat mile. The carrier estimates the metric to reduce to 7-8.5% in the third quarter of 2017. Prior guidance had anticipated a drop of 2-4%. The below-par guidance was mainly due to disruptions induced by Harvey.

Other Headwinds

On another warning note, airline companies feel skeptical about Hurricane Irma, that has already resulted in multiple flights to Caribbean cities being cancelled. The impact of the latest natural calamity on airline stocks is likely to increase further in the coming days .

The decision of Warren Buffett, one of the most revered investors of all times, to cut his stakes from three airline heavyweights — Delta, United Continental and American Airlines — also points at the cloud of uncertainty looming over this key sector.

Apart from 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 expenses on this front are escalating, limiting bottom-line growth.

Price Performance

The Zacks Airline Industry fared poorly due to the headwinds, thereby significantly underperforming the broader market in the last three months. The S&P 500 Index nudged up 1.5% as against the industry’s decline of 6.5%.

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