These Airline Stocks are Diving, Despite the Strong Travel Season

Travel season is in full swing and it’s going to be a big one.

Last week more than 6 million travelers took to the air as part of their vacation plans.  Another 3 million travelers hit the road.  It makes for a record setting summer travel season.

Most investors are thinking “this is a great time to buy a few travel-related stocks”.

Wrong!

While this year’s travel season is set to be one of the strongest ever, the fact is that rising costs and budget-minded travelers are already translating into lower profit potential for airline and hotel stocks.

One of the “go to” groups of travel stocks is already showing wear from the travel season.

Airline companies like Delta (DAL), Southwest Airlines (LUV), American Airlines (AAL), and United Airlines (UAL) have turned lower over the last two months, losing 10%-20% of their value from their stock price highs in May.

At the heart of the airlines’ problems are rising costs in the way of fuel, labor and airport fees.

Since the beginning of June, Oil prices have increased more than 15%.

Fuel costs are the biggest expense for airlines.

The price of jet fuel can significantly impact an airline's operational costs since it accounts for a substantial portion of total expenses.

Airline companies do take measures to hedge rising fuel prices, however the current geopolitical events and additional volatility in oil prices are making the hedges themselves more expensive. This puts the airlines in a lower operating margin environment that will lower stock price valuations.

As if that’s not enough, the airline stocks are facing higher labor costs as they deal with pilot and flight staff shortages, airport fees and even interest rate costs.

When you bottom line it, the airlines are flying more travelers and making less money. Not ideal.

Here’s a quick summary of the top three airline stocks and what to expect.

American Airlines (AAL)

Last quarter, American Airlines’ management saw what was coming.

The company missed their earnings mark in April, despite better-than-expected revenue and revenue growth.   But the company appeared to see a storm brewing on the horizon.

In May, management lowered expectations for their upcoming earnings report.  This was ahead of the huge rise in oil prices.  Bookings for the airline have been on the rise, but rising fuel prices would quickly consume the additional revenue.

Three analysts issued downgrades on the stock shortly after the earnings guidance, adding selling pressure to the stock.

From a technical view, American Airlines is breaking towards a critical price level.

The stock is trading at $11.00, where it has found support for the last month.  A break through that price will increase volatility and selling, targeting a move to $10 ahead of the company’s earnings just ten days away as investors begin to fear the worst.

AAL Price Chart

United Airlines (UAL)

United shares hold a different story that American Airlines.

Last quarter’s earnings catapulted the stock 36% higher over a six-day period as the company beat their earnings and revenue targets and even guided their expectations for the next earnings report higher.

They doubled down on that outlook in May by reaffirming earnings expectations for the July 17 earnings report.

Since then, oil prices have increased more than 10%, an expense that will start to have a fast effect on the quarter’s results.

Traders are bidding the stock lower on expectations that the company will miss the upcoming and likely lower the outlook for next quarter’s numbers as fuel prices continue to rise.

The stock has nearly erased last quarter’s post-earnings really, trading 17% lower than its May highs.

Shares are likely to fins some support at the $45 price as this is where the stock’s 200-day moving average is trading, but any lowering of guidance from the company’s management will cause that support to be short term.

Target a continuation of the trend lower to land United Airlines stock at $40.

UAL Price Chart

Allegiant Travel Company (ALGT)

Allegiant is one of the low-cost airlines that has been suffering since last year’s travel season.

The company targets smaller markets with limited-frequency flights.  This allows the company to operate with notably lower ticket prices, but there’s a catch.

Allegiant’s model is also built on offering additional services to their travelers.  Hotels, rental cars and other services allow the company to add to revenue from their airline subsidiary.  Expedia and other travel advisor companies have pressured that model.

Unlike other airlines, Allegiant tends to slow the number of flights they offer in the summer as many of their destinations are warmer weather locations like Florida, Mexico and Las Vegas.

Fewer flights and travelers already squeeze margins that now have the additional weight of higher fuel and labor costs.

As a result, the stock is trading in a short- and long-term bear market trend with a high likelihood that the stock’s descent will continue.

Shares tried to find support at $50 a few weeks ago, only to quickly break that psychological support level on Friday with a one-day 8% move lower.

Allegiant’s Earnings are slated for July 31.  The move below $50 - combined with the company’s trend of lower guidance for the three out of the last four earnings reports – means that investors are looking to sell ahead of the report.

Target a move to $40 ahead of Allegiant’s earnings at the end of the month.

ALGT Price Chart