Airline Stocks off the Mat After Mother Nature’s 1-2 Punch

Airline stocks soared as Hurricane Irene left the U.S. on Monday — after causing the cancellation of some 14,000 flights and stranding as many as 750,000 passengers. Coming just days after a rare 5.8 magnitude earthquake in Virginia that caused delays and diversions, Irene’s mayhem was a double whammy for airlines like Delta (NYSE:DAL), American Airlines parent AMR (NYSE:AMR), United Continental (NYSE:UAL), US Airways (NYSE:LCC) and JetBlue (NASDAQ:JBLU).

After last Tuesday’s earthquake, shares of Delta, AMR and US Airways fell an average of 5%; JetBlue and United Continental lost an average of 2.5%. All of those stocks rebounded dramatically Monday, with AMR up 8.59%, JBLU up 7.13%, DAL and LCC both up by more than 5% and UAL up nearly 4%.

Although Southwest (NYSE:LUV) also was hammered by storm cancellations, the carrier’s Aug. 23 ex-dividend date might have been a timely distraction. LUV shares rose more than 8% Tuesday through Friday and gained nearly 6% in Monday’s trading.

Those gains were welcome given the turbulence airline stocks have faced this year. But there are likely to be more storm clouds lurking behind Monday’s silver linings. Last week’s flight cancellations alone could cost U.S. airlines more than $250 million — and that’s not chump change for an industry with such slim margins.

Here are three reasons why Mother Nature’s late-summer wrath still might pack a wallop for the rest of the year:

  1. Airline Earnings Already Are Stressed. It’s not news that the airline industry faces significant headwinds, including fuel price volatility and bad PR from fare increases and ancillary fees. But between April and June, carriers’ earnings suffered their first year-over-year decline in two years, according to the International Air Transport Association. Capacity planning has helped, but load factors – which measure how many passengers are in the number of available seats – are trending about 1% lower.
  2. Flight Cancellations Are Expensive. Since U.S. airlines can be fined up to $27,000 per passenger for any flight stuck on the tarmac for more than three hours, it’s far cheaper for airlines to cancel flights when bad weather threatens. But airline earnings still take a hit when planes are grounded. Last winter’s blizzards lopped off $10 million to $45 million off U.S. airlines’ earnings in the fourth quarter alone — and that doesn’t count losses from February’s blizzards, the Japan earthquake and tsunami in March and the most recent volcanic ash cloud over Europe.
  3. The Worst Weather Still Is Ahead. Irene graciously left airlines their Labor Day weekend unscathed, but Atlantic hurricane season, which officially runs from May through November, is just hitting its stride. And while carriers do budget for their version of “snow days,” another winter like last year’s would not be welcomed by airlines — or investors.

Bottom Line: The airline industry is a tough place to make money right now. In addition to the usual challenges, such as razor-thin margins, cutthroat competition, fuel price volatility and growing customer discontent, carriers must grapple with a host of unknown factors that can be difficult, if not impossible, to plan for. That means airline stocks likely will take one step forward and two steps back in the short term.

But don’t count the industry out. Forget the obvious — 21st century travelers are not going to switch to buses, trains and steamer ships. Remember this: Ten years ago next month, the U.S. airline industry showed it could take the ultimate sucker-punch knockout — and come back leaner, meaner and better equipped to go the distance. Consolidation and change will continue in the short term, but don’t count out a long-term play on airlines with the strongest competitive focus and aggressive cost control.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.

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