Last week, the broader market sell-off battered US airline stocks. New tariffs on Airbus planes and dismal economic data impacted US airlines’ long-term growth prospects. Among US carriers, Delta Air Lines (DAL) fell the most last week with a decline of 7.7%. American Airlines (AAL), United Airlines (UAL), and JetBlue stocks fell 4.4%, 4.4%, and 2.6%, respectively.
The iShares Transportation Average ETF (IYT), which has allocated about 20% of its funds in passenger airline stocks, fell 3%. The Dow Jones Transportation Average (^DJT) index also lost 3% of its market value.
Why did airline stocks fall?
The major sell-off came after the US won a 15-year unfair trade practice case against the EU. On October 2, the WTO (World Trade Organization) found that the EU provided illegal subsidies to Airbus. In the ruling, the WTO allowed the US to tariff European-made goods worth $7.5 billion.
In April, the Trump administration said that civil, cargo, and passenger planes are on the priority list for imposing tariffs. As a result, the WTO’s ruling made investors cautious about US airlines’ long-term growth prospects.
Airline stocks fell on October 3 after the US government announced a 10% tariff on European-made airplanes. The new tax would make Airbus’ aircraft more expensive, which would hurt US airlines that have placed orders with the company.
The hefty import duty would have a negative impact on US airlines’ profits, cash flows, and future investment plans. Together, Delta Air Lines, American Airlines, United Airlines, and JetBlue are waiting for deliveries of approximately 570 planes from Airbus.
The Trump administration’s latest move could make trade tensions worse between the US and the EU. The two parties have already imposed import duties on billions of dollars worth of goods. The EU might react to the latest tariff on Airbus.
Notably, the EU filed a similar case against the US for providing unfair concessions to Boeing. The final ruling is expected in early January. Industry experts think that the ruling will favor the EU. Therefore, we think that US airlines could get trapped in the middle of the trade war between the US and the EU.
Last week, the downside in airline stocks was also due to fears of a global economic slowdown. The latest manufacturing and services data released by the ISM reflects the trade and production slowdown in the US.
On October 1, the ISM reported a lower manufacturing PMI for September than August. The PMI reading of 49.1% for September shows another contraction in the manufacturing sector. Notably, the September PMI fell to the lowest level since June 2009. Investors’ fears increased on October 3 when the ISM issued non-manufacturing PMI data for September. The September non-manufacturing PMI of 52.6% was much lower than economists’ forecasts of 55.1%.
Airline stocks’ YTD performance
So far, airline stocks have had a tough ride this year. Most airline stocks haven’t matched the YTD (year-to-date) gain in the broader market. Airline companies grappled with several macroeconomic and company-specific challenges, which kept investors from investing in these stocks. The most common factors were a partial government shutdown, unfavorable weather, Boeing’s 737 MAX crisis, and labor disputes.
With YTD gains of 9.2% and 9.4%, IYT and the Dow Jones Transportation Average index have underperformed the broader market. The Dow Jones and S&P 500 indexes have risen 13.9% and 17.8%, respectively. Spirit Airlines (SAVE) stock has fallen the most followed by American Airlines. The two stocks have fallen 41% and 20%, respectively.
Only a few airline stocks are on a positive trajectory including Southwest (LUV), Delta Air Lines, and United Airlines. Shares of Southwest, Delta Air Lines, and United Airlines have risen 13.6%, 7.8%, and 0.7%, respectively.