Airline stocks have been grappling with high cost woes since the start of 2018 with crude oil prices trending upward. Needless to mention, fuel prices account for a major chunk of airline expenses. Thus, a rise in the price of this commodity certainly does not bode well for the industry.
On account of steep fuel costs, airline major American Airlines Group Inc. (AAL - Free Report) trimmed its 2018 earnings per share guidance. Adjusted earnings are now expected between $4.50 and $5.00 (previous outlook had hinted at earnings between $5 and $6).
Moreover, the International Air Transport Association’s (“IATA”) lowered profitability forecast for airlines in 2018 was primarily due to the same reason. The research firm now predicts global net profit for the industry to be $33.8 billion, much lower than the earlier forecast of $38.4 billion, unveiled last December.
Why Airlines Tumbled Yesterday?
The reason behind airline stocks’ dramatic fall yesterday is nothing new. Brent crude oil rose to $81 per barrel yesterday, up 3% intraday. The price of the commodity reached an all-time high in four years. Meanwhile, WTI crude increased by the same level to $72. The sudden spike in oil prices caused shares of major U.S airlines to decline significantly. Carriers like Delta Air Lines, Inc. (DAL - Free Report) , JetBlue Airways Corporation (JBLU - Free Report) , American Airlines, Southwest Airlines Co. (LUV - Free Report) , United Continental Holdings, Inc. (UAL - Free Report) and Spirit Airlines, Inc. (SAVE - Free Report) declined approximately 3.7%, 2%, 3.7%, 2.7%, 2.3% and 3.8%, respectively, at the close of business on Sep 24. Consequently, the NYSE ARCA Airline Index slid 2.6%.
Each stock mentioned above carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Joint OPEC (Organization of the Petroleum Exporting Countries)-non-OPEC Ministerial Monitoring Committee held a formal meeting during the weekend. However, the participants failed to draw up a plan to boost oil supply so as to dampen the adversity arising from the potential shortfall of around 2 million barrels of oil per day with full-fledged U.S. sanctions on Iran’s exports expected to be effective Nov 4.
According to some market watchers, oil prices are likely to touch $100 per barrel, in the event of U.S. sanctions completely cutting off Iranian oil supply.
Labor Costs: Another Headwind
Apart from escalating fuel prices, mounting labor costs are weighing on the airlines’ bottom line. Of late, the carriers have been striking frequent labor contracts in a bid to meet employee needs. However, the move ended up in pushing up labor costs. In fact, high labor costs also put pressure on the IATA’s reduced profitability forecast for 2018.
Dismal Price Performance
Due to the above downsides, the Zacks Airline Industry has declined 11% so far this year against the broader Transportation sector’s 1.3% rise.
Bearish Industry Rank
The Zacks Industry Rank of 210 (of 250 plus groups) carried by the Zacks Airline industry further highlights the pessimism revolving around the stocks. This unfavorable rank places the companies within the bottom 18% of the Zacks industries.
We classify the total 250-plus industries into two groups: the top half (i.e. industries with the best average Zacks Rank) and the bottom half (industries with the worst average Zacks Rank).
Over the past 10 years, the top half beat the bottom half by a factor of more than 2 to 1 using a week’s rebalance.
Click here to know more: About Zacks Industry Rank
Our proprietary Heat Map also shows the industry’s rank in the bottom 50% over the past eight weeks.
Measures to Counter the Challenges
With high operating expenses (especially fuel) taking a toll on profitability, airlines are trying hard to mitigate its impact. To this end, carriers like Delta, JetBlue, United Continental and American Airlines recently hiked checked baggage fees. The carriers are now charging $30 for the first checked bag and $40 for the second, up from the previous $25 and $35, respectively. Meanwhile, JetBlue also levied an increase in fees to change tickets. The carrier now charges $200 for changing or canceling a ticket valued at more than $200. Earlier, it used to charge $150 for the same. However, passengers belonging to the highest fare class are exempted from the renewed fee structure.
What Lies Ahead?
With fuel prices shooting up continually, airlines seem to have little respite. Only a few days into the baggage-fee hike move, a sharp rise in oil prices caused shares of major airlines to tumble.
Nonetheless, we expect the baggage-fee hike effort to partly offset the negativities associated with airline expenditures. After all, the U.S. airline industry generated approximately $7.5 billion revenues from baggage and reservation change fees in 2017, a big leap from $5.7 billion in 2010. Change fees alone contributed $2.9 billion to total revenues.
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