Why Airline Stocks Are Underperforming the US Market

The year so far hasn’t gone well for airline stocks, as the majority have underperformed the broader markets. The US Global Jets ETF (JETS) is up just 1.2% YTD (year-to-date). The ETF invests in passenger and cargo airlines, airplane makers, and airport and terminal services companies. Its YTD return is significantly lower than the gains of major US indexes. The Dow Jones, the S&P 500, and the Nasdaq are up 11.3%, 15.7%, and 19.8%, respectively, YTD.

Why Airline Stocks Are Underperforming the US Market

Spirit Airlines (SAVE) is the worst performer among major US air carriers. The stock has lost 33.4% of its value in the year so far. American Airlines (AAL), Hawaiian Holdings (HA), and Alaska Air Group (ALK) stocks have fallen 19.6%, 3.7%, and 1.2%, respectively.

Nonetheless, Delta Air (DAL), Southwest Airlines (LUV), and United Airlines (UAL) are the three carriers that have outperformed their peers. Shares of Delta and Southwest are up 15.6% and 7.6%, respectively, YTD. United Airlines stock has also managed to be in the positive with a YTD return of 0.4%.

External factors affecting Airline stocks

Several external and company-specific factors are responsible for the underperformance of the airline industry. Among the macroeconomic issues, uncertainty over US-China trade negotiations and global slowdown concerns have kept the entire broader market highly volatile this year.

Weakened trade ties and economic slowdown don’t affect the airline industry directly. Instead, they have a long-term impact. Sluggish economic growth and tidy trade relations could lead to a gradual decline in business travelers’ traffic in the long run. An economic slowdown will negatively affect the job market, thereby preventing people from making vacation plans.

Severe winter conditions and a partial government shutdown also hampered the operations of several airlines at the start of 2019. In an April 9 regulatory filing, American Airlines reported over 1,000 flight cancellations in the first quarter due to the partial US government shutdown in January.

In a March 27 regulatory filing, Southwest revealed that it had recorded over 3,800 flight cancelations during the first quarter due to unfavorable weather conditions. Moreover, the government shutdown in January caused Southwest to delay its Hawaiian Islands expansion plan. All these external factors made investors susceptible to the airline industry’s near-term growth prospects.

Internal factors

Most airlines remain saddled with several other company-specific issues. Excluding Delta, the top three US airlines are facing massive flight cancellations due to the worldwide grounding of Boeing’s (BA) 737 MAX planes.

Boeing’s MAX jets have been facing a global flying ban since mid-March following two deadly accidents within five months of each other. Southwest, American, and United own a combined 72 MAX aircraft. Since its grounding, Southwest has canceled over 20,000 flights. American and United recorded flight cancellations of 7,800 and 3,440, respectively, in the second quarter. The three air carriers have registered sluggish top line growth in the previous two quarters due to massive flight cancellations.

Apart from MAX problem, Southwest and American faced business disruptions due to the sudden rise in unscheduled maintenance work. The issue was connected to pending labor contract negotiations with mechanics. Although Southwest managed to reach an agreement with mechanics in May, the deal was considered very expensive. The airline registered 2,800 flight cancellations in the first quarter due to unscheduled maintenance work.

American Airlines is still trying to negotiate with mechanic unions. The company revealed that work slowdown by mechanics had caused it over 900 flight cancellations, according to CNBC.

Southwest Airlines has emerged as a major competitive threat to Hawaiian Holdings and Alaska Air across their key operational routes. Southwest received regulatory approval to initiate its Hawaiian services through a long overwater route in late February. The company is continuously adding new flights to the island for a much cheaper fare than other airlines.

Southwest’s low-fare services to the island could severely hurt Hawaiian Holdings and Alaska Air, as they have the biggest number of flight services on the island. To remain competitive, both companies would have to lower their ticket fares drastically, which could hurt their revenues and margins.