Daily Outlook

3 Reasons Why Airline Stocks Are Still a Sell Despite Recovery

  1. Fierce Competition Is Coming
    Improving passenger traffic may signal hope for carriers, but it isn’t yet time to pop the champagne yet. Numbers are unlikely to return to pre-pandemic levels anytime soon.

To compete for the reduced number of flyers amid state reopenings, you can expect a significant price war. Southwest Airlines CEO Gary Kelly has warned employees to brace for heightened competition:

We’ll compete hard for customers, understanding it will be a brutal, low-fare environment as there are far more airline seats, and there will be for some time, than there are customers.

  1. Declining Revenue Per Available Seat Mile
    To observe physical distancing measures and make customers comfortable enough to fly, airlines have had to remove the middle seat, among other steps. Realistically, they can only operate at 70% capacity.

This is below the break-even load for most airlines, including the U.S. Big Four. American’s break-even load factor is 78.9%, United’s is 75.6%, while Delta’s is 74.2%, according to Florida Panhandle.

Southwest is the most efficient of the Big Four managing to break even at a load factor of 72.5%. At 70% capacity, Southwest makes a loss of $782 when operating a 216 passenger aircraft on a 1,000-mile route. American books a loss of $3,519 under similar circumstances.

This means airlines would have to raise fares and cut costs drastically to break even while adhering to physical-distancing measures. The former is unlikely in the current environment.

  1. Rising Oil Prices
    On average, fuel costs account for roughly a quarter of airline expenses. The demand-destruction in passenger traffic coincided with tumbling oil prices. But after the drastic fall, oil has staged a dramatic recovery.

West Texas Intermediate crashed into negative territory in April but has since rebounded above $36.

Had oil prices remained low, it would have been a relief to airlines in terms of operating expenses. This is not the case, though, as major oil producers are pushing for further cuts.

3 Reasons Why Airline Stocks Are Still a Sell Despite Recovery, CCN, Jun 8

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