Airline stocks start to take off
Drop in capacity projections boosts shares, with group up 9.9% since late June low
Shares of airline operators are no longer in free fall.
Company projections for the number of passenger seats that are offered have come down—a development that has helped boost sentiment. Investors tend to worry about passenger seats offered because airplanes flying with too many unsold seats are less profitable and quicker-than-expected expansion can lead to lower ticket prices.
Worries that a rise in passenger capacity would lead to emptier planes and fee competition had hurt airline shares before the most recent earnings reports. The NYSE Arca Airline Index fell 20% from its January peak through late June, hitting its lowest level since late 2016.
But airline stocks have clawed back some of those losses lately, with the group adding 9.9% since hitting its June 28 low. In the past month alone, Southwest Airlines Co. shares have added 15% and Delta Air Lines Inc. is up 10%.
On Monday, the group continued its recent surge. American Airlines Group Inc. was the S&P 500’s second-best performer, climbing 5.8%, and every airline stock in the index added at least 3%.
Industry analysts say the drop in capacity projections was enough to give the stocks a boost, even with fuel expenses continuing to threaten profitability.
“Sentiment on U.S. airline stocks has recovered somewhat,” Raymond James analysts said in a note to clients earlier this month.
That could brighten the outlook of analysts who look at shares of airlines and other transportation companies as an economic indicator because their performance is typically tied to global growth. Although continuing trade tensions have dinged growth-sensitive assets recently, the Dow Jones Transportation Average is at its highest level since January and has risen in five straight sessions.
Airline companies and other large industrial companies generally reported favorable second-quarter demand despite worries about protectionism.
Another potential positive for airline stocks: Energy prices have started to come down. After a monthslong rally that analysts say caught airline companies off-guard, U.S. crude has declined 10% from its June multiyear high. Some analysts think higher supply from large producers such as Saudi Arabia could keep a lid on oil prices, potentially relieving some cost pressure on large fuel consumers such as airline companies.
Still, after months of investors’ jitters over capacity, some analysts think investors will want to see sustained share performance and future projections before taking a fresh look at beaten-down airliners.
“While this is an encouraging first step, all eyes will be on 2019 plans,” the Raymond James analysts said.