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Why Airlines Tanked After DOT's Tentative Cuban Clearance
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Airline stocks made a nightmarish start to this week with key companies like Delta Air Lines, Inc. (DAL - Free Report) , American Airlines Group Inc. (AAL - Free Report) ,United Continental Holdings, Inc. (UAL - Free Report) , Alaska Air Group, Inc. (ALK - Free Report) and Southwest Airlines Co. (LUV - Free Report) witnessing steep declines in stock prices on Apr 2. Naturally, the sector tracker — NYSE ARCA Airline Index — also decreased significantly (to the tune of 3.3%) on the same day.
Why the Downturn?
While continued fears of a U.S.-China trade war and the tech sell-off played a significant role in the Monday mayhem, there was a sector-specific issue as well. The U.S. Department of Transportation (DOT) recently awarded (tentatively) five U.S.-based leading carriers to operate scheduled flights to Havana.
The DOT decision to allocate new US-Havana frequencies became necessary, following the decision of many carriers like Frontier Airlines and Spirit Airlines, Inc. (SAVE - Free Report) to terminate operations between the nations due to lower-than-expected demand. Spirit Airlines carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
However, the decision led to fears of competition intensifying among leading carriers as Havana is popular tourist spot. In fact, in a bid to attract customers, a price war may emanate between the U.S. carriers. To match the low fares of carriers like JetBlue Airways Corporation (JBLU - Free Report) and Southwest, legacy carriers namely Delta and American Airlines might follow suit which is likely to trigger a price war.
The Award
The DOT has proposed that Delta will operate an additional round of daily flights connecting Miami and Havana. American Airlines, which already operates four daily flights between the cities, has also been granted tentative permission to conduct an additional roundtrip on the route. Meanwhile, JetBlue Airways, which already has a significant Cuban presence, has been permitted to operate additional flights on the Fort Lauderdale-Havana route (six times a week), apart from launching service between Boston and Havana on Saturdays.
Following the final approval, Southwest will operate additional daily flights connecting Fort Lauderdale and Havana. Finally, United Airlines and its code-share partner Mesa Airlines have received a tentative approval from the DOT to extend its Houston-Havana Saturday service to a daily operation.
The new allocations, however, have to be implemented within three months of the receipt of the final clearance from the government. Notably, the DOT had to reject other applications for additional flights to Havana as the agreement between the United States and Cuba allows only 20 daily roundtrip flights between the nations.
Other Headwinds Plaguing Airlines This Year
Apart from the fears of competition intensifying on the Havana routes, stocks in the airline space have hurt been by other headwinds as well. Foul weather has been hurting airlines since the beginning of the year. Apart from Winter Storm Grayson in January, successive nor’easters in March disrupted airline operations significantly due to multiple flight cancellations.
Weather-related disruptions have continued in the current month too with a snowstorm forcing airlines to cancel many flights. In fact, 466 flights in/out of the United States were cancelled yesterday due to the storm. Southwest’s bleak view, with respect to operating revenue per available seat miles (RASM), for first-quarter also dented stocks in the space.
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
Image: Bigstock
Why Airlines Tanked After DOT's Tentative Cuban Clearance
Airline stocks made a nightmarish start to this week with key companies like Delta Air Lines, Inc. (DAL - Free Report) , American Airlines Group Inc. (AAL - Free Report) ,United Continental Holdings, Inc. (UAL - Free Report) , Alaska Air Group, Inc. (ALK - Free Report) and Southwest Airlines Co. (LUV - Free Report) witnessing steep declines in stock prices on Apr 2. Naturally, the sector tracker — NYSE ARCA Airline Index — also decreased significantly (to the tune of 3.3%) on the same day.
Why the Downturn?
While continued fears of a U.S.-China trade war and the tech sell-off played a significant role in the Monday mayhem, there was a sector-specific issue as well. The U.S. Department of Transportation (DOT) recently awarded (tentatively) five U.S.-based leading carriers to operate scheduled flights to Havana.
The DOT decision to allocate new US-Havana frequencies became necessary, following the decision of many carriers like Frontier Airlines and Spirit Airlines, Inc. (SAVE - Free Report) to terminate operations between the nations due to lower-than-expected demand. Spirit Airlines carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
However, the decision led to fears of competition intensifying among leading carriers as Havana is popular tourist spot. In fact, in a bid to attract customers, a price war may emanate between the U.S. carriers. To match the low fares of carriers like JetBlue Airways Corporation (JBLU - Free Report) and Southwest, legacy carriers namely Delta and American Airlines might follow suit which is likely to trigger a price war.
The Award
The DOT has proposed that Delta will operate an additional round of daily flights connecting Miami and Havana. American Airlines, which already operates four daily flights between the cities, has also been granted tentative permission to conduct an additional roundtrip on the route. Meanwhile, JetBlue Airways, which already has a significant Cuban presence, has been permitted to operate additional flights on the Fort Lauderdale-Havana route (six times a week), apart from launching service between Boston and Havana on Saturdays.
Following the final approval, Southwest will operate additional daily flights connecting Fort Lauderdale and Havana. Finally, United Airlines and its code-share partner Mesa Airlines have received a tentative approval from the DOT to extend its Houston-Havana Saturday service to a daily operation.
The new allocations, however, have to be implemented within three months of the receipt of the final clearance from the government. Notably, the DOT had to reject other applications for additional flights to Havana as the agreement between the United States and Cuba allows only 20 daily roundtrip flights between the nations.
Other Headwinds Plaguing Airlines This Year
Apart from the fears of competition intensifying on the Havana routes, stocks in the airline space have hurt been by other headwinds as well. Foul weather has been hurting airlines since the beginning of the year. Apart from Winter Storm Grayson in January, successive nor’easters in March disrupted airline operations significantly due to multiple flight cancellations.
Weather-related disruptions have continued in the current month too with a snowstorm forcing airlines to cancel many flights. In fact, 466 flights in/out of the United States were cancelled yesterday due to the storm. Southwest’s bleak view, with respect to operating revenue per available seat miles (RASM), for first-quarter also dented stocks in the space.
So far this year, the Zacks Airline industry has declined 6.1% due to the headwinds.
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Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
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