Although revenge travel or the desire to get out of the house due to Covid-19 imposing collective cabin fever bolstered sentiment for airline stocks after they slipped to multi-year lows, that yearning may finally be waning. Recently, American Airlines (NASDAQ:AAL) disclosed its profit outlook for its upcoming first-quarter earnings report. Unfortunately, it failed to meet expectations, clouding the broader air travel industry.
Specifically, American anticipates that adjusted earnings per share will land between 1 cent and 5 cents. Per Barron’s, “[t]hat’s an improvement on its previous guidance of approximately break-even, but it falls below analysts’ expectations of five cents per share, according to FactSet data.”
“In general, estimates have been trending higher over the past few weeks, although it appears as though some estimates were too aggressive,” Cowen analysts stated in a research note. AAL stock slipped about 9% on the less-than-encouraging disclosure. However, other airline stocks also felt the heat.
In particular, Delta Air Lines (NYSE:DAL) dipped approximately 2% during the midweek session. Essentially, DAL feels significant pressure as it will be the first major airliner to report Q1 earnings on Thursday. Naturally, its print should have an impact on other airline stocks reeling from various challenges to the consumer economy, including rising layoffs and last month’s banking sector failures.
Oil Production Cuts Pose Headwinds for Airline Stocks
When the Organization of the Petroleum Exporting Countries (OPEC) and non-member oil-producing nations — known as OPEC+ — announced surprise production cuts earlier this month, the subsequent response yielded an expected outcome: higher crude oil prices due to the implied supply constraint. Unfortunately, this may have a negative impact on airline stocks ahead of the traditionally busy summer travel season.
As well, the OPEC+ cuts come at an awkward time for airline stocks. With many pilots and flight crews retiring during the Covid-19 pandemic, companies must fill the backlog with replacement hires. At the same time, they must reduce costs to meet brewing economic realities.
This framework may help explain a curious decision that United Airlines (NASDAQ:UAL) implemented. Back in 2015, United quietly introduced a “surprise and delight” upgrade policy, offering upgrades to elite flyers. But starting in August, this program will be phased out for flights on certain jetliners.
Why It Matters
Despite the dark clouds appearing over airline stocks, it would be inaccurate to characterize circumstances as holistically negative. Specifically, the Associated Press mentioned JPMorgan Chase analyst Jamie Baker, who stated that slowed bookings largely stemmed from reduced travel interest within the U.S.
However, Baker noted that international bookings increased significantly from last year. Per the AP, “[h]e suggested the geographic breakdown in travel is returning to a normal pattern after tilting more than usual toward domestic trips last year.”
Notably, airline stocks with a domestic focus like JetBlue Airways (NASDAQ:JBLU) and Southwest Airlines (NYSE:LUV) declined a bit more than 1% on Wednesday.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
