Summer’s ending with a thud for US airline stocks, as a litany of problems from rising oil costs to flagging domestic-travel demand threaten earnings.
The 10-member S&P Supercomposite Airlines Index fell 9.5% in August, for its worst monthly decline since December. The slump coincides with a souring mood on Wall Street toward the sector: Analysts have cut their earnings-per-share estimates for 2023 by an average of about 15% in the past month for the index members, according to data compiled by Bloomberg.
The index is well off its year-to-date peak after surging almost 29% through July, with fewer potential positive catalysts between now and the year-end holiday season.
“With the airlines, particularly in the domestic market, we are well past the peak,” said Conor Cunningham, an analyst at Melius Research. “You look out to 2024 and the pricing environment’s worse and now you have fuel higher.”
Read more: US Airlines Eyeing a Summer Boom Are Slashing Prices Instead
This week, Cunningham reduced 2024 targets for every US airline he covers — outside of Hawaiian Holdings Inc. — as costlier fuel compounds the hit from lower fares. Earlier in the month, Goldman Sachs Group Inc.’s Catherine O’Brien lowered price targets across her airlines coverage, citing higher jet fuel prices as one factor.
Many of the smaller carriers such as Spirit Airlines Inc. and Alaska Air Group Inc. suffered from a shift in demand to international destinations at the expense of US cities. That was good news for legacy carriers Delta Air Lines Inc. and United Airlines Holdings Inc., which have robust overseas routes and capacity that is tracking higher, according to Evercore. The firm estimates that international capacity for the third quarter is up 20%, with domestic capacity up 10%.
‘Washed Out’
Evercore analyst Duane Pfennigwerth says the industry’s stocks now feel “washed out and oversold” as the summer has been a “punishing time” with fuel prices rallying.
“We believe getting estimates more aligned with reality (another reset) and better seasonality (4Q) should improve sentiment over time,” he wrote in an Aug. 28 research note.
With the pullback, airline shares trail travel peers. Cruise lines Royal Caribbean Cruises Ltd. and Carnival Corp. are among the biggest percentage gainers in the S&P 500 Index this year, while an index of hotels, resorts and cruise lines hovers around a record high, showing that Americans are still booking trips.
Investors have been yanking money from the $1.6 billion US Global Jets exchange-traded fund (ticker JETS), the largest ETF tracking the industry’s shares, for more than a year. The gauge, which counts American Airlines Group Inc., JetBlue Airways Corp. and Hawaiian Holdings among its top holdings, is rounding out 16 straight months of outflows, according to data compiled by Bloomberg.
Jane Edmondson, co-founder of EQM Indexes, says the ETF was a thematic play on the economy’s emergence from the pandemic. But outperformance in trendier areas of the market is making the airline industry more of an afterthought.
“Those thematic investors may have rotated into other emerging growth themes such as AI,” she says.