Just when it seemed as if domestic airline stocks like Delta Air Lines, Inc. (NYSE:DAL) and American Airlines Group Inc (NASDAQ:AAL) as well as foreign carriers like Air France KLM SA (ADR) (OTCMKTS:AFLYY) were going to take flight again, these stocks were grounded.
This time, tragedy in Brussels was the cause. Three bombs were detonated in the Belgian city — two at an airport — forcing travelers to rethink or reschedule travel plans, sending airline stocks lower.
Is it a buying opportunity? For that matter, were airline stocks like AAL and DAL, or even AFLYY, a buy before Tuesday’s attacks?
Actually, yes they were, and they still are.
Belgium Bombs Shock Markets
Not a great deal is known yet about the bombing in Brussels, but we do know two explosions were heard at the Zaventem airport, and one bomb was detonated at the Maalbeel Metro station. A total of 34 lives were taken, so far. More may be added to the figure.
Islamic jihadis have announced they are responsible for the coordinated attacks, which came just days after suspected terrorist Salah Abdeslam — likely involved in similar bombings in Paris, France on Nov. 13, 2015 — was arrested in Belgium.
The response so far has been, for better or worse, a familiar one. Flights to and from Belgium were suspended indefinitely while investigators piece together what happened. Brussels’ subway system was also stopped.
The Zaventem airport’s cancelled flights have created a ripple effect, forcing most airlines to reroute or cancel flights to or from the area.
The bigger toll taken, of course, is on the confidence of people all over the world. Terror groups have once again reminded the world that no one and no place is truly safe, and that lives are particularly vulnerable at key transportation hubs so important to most individuals.
With travelers (would-be or actual) now forced to rethink the importance of traveling — and taking a risk to do so — airline stocks are made victims as well. American Airlines shares were lower by more than 2% on Tuesday. Delta shares fell 3% or more at points. Air France KLM, which is much closer to Belgium, was down more than 4%, as an adverse impact on business is almost inevitable.
Airline Stocks Tend to Be Resilient
The knee-jerk response from investors is understandably a bearish one. With yet another round of terrorism creating a distaste for travel in addition to the heightened security measure that will ensue, it only makes sense that airline stocks will face a headwind.
Yet, there’s no empirical evidence that such attacks actually take a long-term, measurable toll on air travel, or airlines’ results.
For better or worse, terrorist bombings and equally alarming natural disasters have become the norm, and individuals have become mostly numb to them … at least in terms of travel.
The chart of the NYSE Airlines Index below tells the tale; these are just the major attacks and incidents that could have directly affected travel in Europe and the United States.
None of the attacks that theoretically should have had a lasting adverse impact on these stocks had such an impact.
The ebb and flow — mostly a bullish ebb and flow — tends to be dictated by economic strength and the price of oil. Crude prices that linger at exceedingly high levels tend to work against airlines, imposing high operating costs.
Yet, counterintuitively, sometimes exceedingly low oil prices can also work against airline stocks, as consumers eventually demand air carriers to drop fares to cutthroat (and sometimes thinly profitable) levels in an effort to compete with the no-frills airlines that are now able to charge rock-bottom deals too good to pass up.
The recent moderation of oil prices pushes airlines’ operating costs and marketable fares back into “Goldilocks” territory.
Bottom Line
Tragic as the Belgium bombings are, the fact of the matter is, they likely won’t prove to be a lasting drag on air travel. Not only are travelers used to such news, but governments and airport security teams are accustomed to ramped-up security measures and are getting better and better at preventing problems before they materialize and cost lives. In a month, this week’s bombings will be a fading memory for most, and airline stocks will be back in their proverbial sweet spot.
So today may be a buying opportunity for investors who believe the global economy remains in growth mode.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
