The Airline Industry's Troubles Just Got Worse

The airline industry is preparing to see a strong "Sell the News" decline as the earnings season moves forward.

You can't turn the news on without hearing about the airline industry every day...

  • Planes with tires coming off
  • Emergency landings due to an unruly flier
  • Weather delays stranding thousands

Despite all of that, you and I have decided early this year that we were still going to fly this summer.

Traders in the market picked-up on that and drove the airline stocks to their 2024 highs just a few months ago.  That move was a good old fashioned "Buy the Rumor" rally.  The rally was worth a 20% move in these stocks.  But the other side of that trade is starting to materialize.  This is the side that the airline bulls don't want to see.

Just last week the TSA and other sources reported that the Fourth of July holiday week saw the most travelers ever, so the forecasts for a hot summer travel season were true.

But none of that demand is turning profits for the airline stocks.  That's a problem.

The Results Start Coming In

Delta airlines stock is trading more than 7% lower today after the company reported their second quarter earnings this morning before the market open.

The company reports showed what I wrote about just a few days ago, airlines are getting squeezed by expenses.

Revenue for the second quarter met analyst expectations, but the company’s earnings per share missed analysts’ target by $0.01.  The earnings miss was the first since April 2023.

Delta’s management also guided their revenue and earnings for the third quarter lower as the company adjusts to oversupply in the runup to the 2024 summer travel season.

This means that the summer travel season is actually working against Delta and other airline companies.

Travelers Are Out There

Headlines for the last three months have built this summer travel season as one for the record books as travelers look to get out on vacation ahead of what is perceived to be a slowdown in the economy.

Consumers have been using credit cards and other debt to finance their recent spending.  That activity is showing some cracks in the otherwise strong consumer.

Just yesterday, Mastercard (MA) and Visa (V) were downgraded from Buy to Hold by Bank of America.  The downgrade reflects the fear that rising credit card debt and delinquencies will start to weigh on the credit card companies.

In May, the Federal Reserve Bank of St. Louis (FRED) released their latest data on rising credit card delinquencies.

The data and report suggested that consumers have stretched their spending by accessing debt through credit cards.  That increase is now resulting in higher delinquencies among consumers in all income demographics.

If you look at this data objectively, it tells you that the airline companies are going to see lowered demand in future.

 

Back to the Airline Stocks

Delta (DAL) has long been one of the airlines associated with business and higher-end travelers.  Delta’s CEO commented on CNBC this morning that the airline is catering to all consumers, not just the higher end.

For that reason, expect that we will see the same margin problems throughout the other airline’s earnings over the next few weeks.  The companies that are already operating on thinner margins are going to get squeezed harder.

United and American Airlines’ stocks have been trading in a bear market trend for the last few months as investors have noted the effect of rising fuel prices on the companies’ bottom line.

We saw all of the airline companies run to their 2024 highs in May as “traders” bought these stock ahead of what was being reported as a record-setting summer of travel.  Those trades have since “sold the news”, leaving long-term investors holding the bag as these stocks work their way deeper into their bear market trends.

Here's the list of upcoming earnings reports for the airline companies, along with their current market trend.

How Do You Use This to Profit?

An investing friend - Shah Gilani - once told me that “airline stocks are trades only, never investments”, he was right.

Look at the US Global Jets ETF (JETS) since its inception in 2015 and you’ll know his words were true.

JETS Price Chart

With that in mind, long-term bulls that may be holding any airline stocks may consider selling or hedging their positions as we head into a period that is likely to see these stocks dive deeper into bearish territory.

Nimble investors and traders may consider using long-term options – such as January 25 puts – to generate positive returns from the airline’s troubled outlook.

As for Delta specifically, investors should expect to see the stock trade another 10% lower to $40 over the next 3-6 months.

Bottom Line

Your money will work harder in other areas of the market, not in the airline stocks