The surprise victory of Donald Trump as the 45th President of the U.S. in November turned out to be a boon for the stock market with major indices skyrocketing. The airline space too was not be left behind with the Zacks categorized Transportation Airline industry gaining almost 8% in the fourth quarter, since Nov 8.
However, matters once again took a turn for the worse after President Trump issued a ban on travelers from seven predominantly Muslim nations – Iraq, Iran, Syria, Yemen, Sudan, Somalia and Libya – from entering the U.S. Though the ban, issued on Jan 27, is temporary (restricting travel from these nations for three months apart from suspending the admission of refugees for four months), the executive order indicated that the ban could broaden up in coming days.
As expected, the immigration ban spelled challenges for airlines stocks as the travel demand is likely to decline. Moreover, in the short-term, costs might escalate due to the obligation to refund tickets. It goes without saying that the executive order, aimed at preventing terrorism in the U.S., was not greeted warmly. In fact, several U.S. airports were rife with protests over the weekend.
What’s in Store for Carriers?
Fears of long-term consequences of the ban caused the stocks of major carriers like Delta Air Lines DAL, American Airlines Group AAL, United Continental Holdings UAL, SkyWest SKYW, Alaska Air Group ALK, Southwest Airlines LUV and JetBlue Airways JBLU significantly losing value over the last few days.
Consequently, the NYSE Arca Airline Index dropped 1.78% on Jan 30. In fact, the index slid to its lowest level ($108.48) in almost eight weeks. Many carriers, including big players like American Airlines Group have exposure to Africa and the Middle East. No wonder, these companies were the worst hit.
Increasing Labor Costs Weighing on Q4 Results
The impact of the order on airline stocks has been even more pronounced as the fourth-quarter earnings season is in full flow and the carriers continue to grapple with the surge in labor costs due to the labor deals inked.
The revised guidance by carriers indicates that such costs will continue to hurt their bottom line in the first quarter as well. For instance, American Airlines expects consolidated operating costs per available seat miles (excluding fuel and special items) to surge 9% in the first quarter, which is more than the increase in the fourth quarter. The forecast, together with the impact of the ban, caused the Zacks Rank #2 (Buy) company to suffer the biggest intraday decline in seven months on Jan 30.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Delta’s System Outage
Technical glitches are the latest problems for carriers. In the last one year, some of the biggest airlines were adversely impacted by technological issues. Delta was the latest victim of disruption in operations due to technological failure.
The Atlanta, GA-based carrier suffered a computer outage on Sunday, leading to the cancellation of multiple flights. The issue, however, has been resolved. As technological infrastructure constitutes a key expense for airline companies, the profitability of carriers could be affected in the event of such malfunctions.
The computer glitch at one of the nation’s biggest carriers, together with the confusion associated with the Presidential order, hit the U.S. aviation space and led to stocks tumbling.
With carriers getting crushed due to the immigration ban, investors interested in this key sector will keenly await updates on this burning issue.
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